Last week was certainly an interesting one for markets as the GameStop/Reddit/Melvin saga dominated headlines and let to volatility and deleveraging. It was also a big week for corporate earnings, with a number of US heavyweights reporting.
BlackRock have long flagged the potential for higher inflation in the medium term, and markets have awoken to this prospect amid expectations for large U.S. fiscal stimulus. They don’t see this derailing the risk asset rally in the near term. We expect a muted response of nominal yields to inflation – our new nominal theme.
COVID-19 and the economic impact of prolonged lockdowns continues to be a driver for Europe’s markets. However, many market observers remain positive on economic outlook, particularly in the United States.
The pandemic has accelerated the rewiring of globalization – with a bipolar U.S.-China world order at its center. The Biden administration is taking a sharply different approach to China in trade and climate policy. Yet overall tensions look set to stay elevated amid ongoing economic and technological competition.
The proposed US$1.9 trillion fiscal package announced by President-elect Joe Biden was the key focus for the United States, whilst in Europe, politics and the continuing fight against COVID-19 held investor attention.
The Democrats’ newly gained majority in U.S. Congress paves the way for greater public spending but the narrow margin limits the scope for higher taxes, in their view. BlackRock expect this outcome to speed up “the new nominal”, or their expectations for stronger growth coupled with stable nominal yields, even as a more infectious virus strain threatens to make the path to a full activity restart more bumpy.
Events in the United States have dominated the headlines, with the ‘blue wave’ Democratic Party Senate win putting a focus on a further fiscal COVID-19 relief.
2020 was an extraordinary year for financial markets. The initial Covid shock triggered a massive selloff, followed by a risk rally that extended to the year end. BlackRock drew three key lessons from navigating markets.
Despite the holiday season looming large, there are still a couple of major catalysts for the markets to watch: Brexit negotiations and the US fiscal developments.
A key consequence of this year’s policy revolution is the potential for a more muted response of nominal yields to higher inflation, in BlackRock’s view. This means investors should start positioning their long-term portfolios for this new dynamic now, in their view.
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