Last Week Review

Investors honed in on virus developments, President-elect Joe Biden’s stimulus proposal and the economic recovery, pushing global equities down 1.2%. Investors believe the stimulus plan supports economic growth, but they worry Congress may add limitations to the plan. The economy faces difficulty, as shown by lackluster U.S. retail sales, low inflation and a weak job market. Despite this, the 10-year Treasury yield touched a nine-month high of 1.15%, reflecting an improving growth outlook. It ended the week down 3basis points at 1.08%.

Vaccine Distribution Improves

The U.S. altered its distribution guidelines to allow people 65 and older and adults with pre-existing conditions to receive a shot. Also, doses previously held for second shots can be released. The changes should make about 50 million more people eligible for vaccination and speed up behind-schedule inoculation as vaccine distribution catches up to production. Johnson & Johnson released an early study that showed its vaccine generated a long-lasting immune response. Pending late-stage trial data and regulatory approval, this vaccine may further add to the global supply. Despite slower-than-expected distribution, there is still a broad expectation for a vaccine-driven return to normalcy in 2021.

Investors See Through Political Noise, Focus on Stimulus

Investors showed little reaction to the U.S. House of Representatives’ vote to impeach President Donald Trump, as they focused instead on Biden’s plan to support the economy. He proposed a new virus relief package worth roughly $1.9 trillion, including stimulus checks, state and local aid, extended jobless benefits, funds for vaccine distribution and a minimum wage hike. Congressional opposition is likely to limit what is ultimately passed. Meanwhile, Federal Reserve leaders tried to walk back talks of a potential reduction of quantitative easing from some members. Eventually, the Fed made clear it is nowhere near tapering quantitative easy tapering as the economy is far from its inflation and employment goals. The U.S. core Consumer Price Index came in well below the Fed’s 2% target at 1.6% year-over-year and initial jobless claims were much higher than expected at 965,000.

This Week Preview

Virus Mutations Add Fire to Virus Risks

New virus strains appear to be aiding a step-up in virus cases. Many infectious disease experts believe current vaccines will prove effective against new virus strains that appear over the near-to-medium term. The market impact of mutations should be limited as long as vaccines still work against them. Virus developments will continue to harvest investor attention this week.

Earnings Resilience Expected

Large U.S. company earnings have exhibited a noticeable level of resilience to this year’s pandemic pressures. Many investors expect this trend to continue as more companies report this week, including Goldman Sachs and Bank of America out of the financials sector on Tuesday. A step back in aggregate earnings resilience would likely act as a market headwind, while better-than-expected earnings have the potential to fuel investor appetite to take risk.

Virus Economic Effects on Watch

U.S. and Europe flash Purchasing Managers’ Index data is expected to slightly soften from prior levels. The European Central Bank and Bank of Japan will both meet this week, though major policy changes are unlikely as both central banks monitor the economic effects of intensifying lockdowns.

Biden Becomes President

On Wednesday, Biden will be sworn in as President of the U.S. Investors don’t expect market-related impacts from possible armed protests. Stimulus negotiations will be key market developments.

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