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Holiday coverage – Risk on remains into the final day of trade

December 31, 2020by Nicholas Kabaso0
  • As we enter the final day of trade for the year many investors will be looking back at 2020 somewhat shellshocked. The COVID-19 pandemic has been the single largest destroyer of economic growth and caused debt levels across the globe to skyrocket.
  • Developed and emerging markets alike have participated in different forms of quantitative easing and stimulus measures in an attempt to support their respective economies.
  • Politicians have, in some cases, used the crisis to entrench their broader agendas. Simultaneously, it is inevitable that the entire globe will have more left-leaning and nationalist policymakers in the coming years as more of the world needs economic support to repair personal and corporate balance sheets.
  • China was the first country to emerge from the COVID-19 induced lockdown, and its economic growth trajectory remains to the topside. Data released this morning, namely the official PMI reading for December, showed a manufacturing sector still in expansion at 51.9, even though it was slightly lower than the 52.1 recorded in November. The fall was blamed on more stringent control measures due to the second wave of COVID-19 hitting many of China‚Äôs trading partners.
  • Today is a historic day that marks the exit of the United Kingdom from the European Union. The divorce takes place at 23.00 GMT this evening and comes after some five-years of political wrangling, which has come at an untold cost. To recap, on the 23rd June 2016, some 17.4mn voters, or 52%, backed Brexit, while 16.1 mn voted to remain in the EU. Many criticised the vote saying that a decision this large should have required a much larger portion of the population to agree rather than just 50%.  
  • Moving over to the financial markets, we see the risk-on trade very much alive as we enter the final day of trade for the year.  There is undoubtedly going to be some position squaring on a tactical basis, with most markets scheduled for an early close.
  • 2021 is going to be an interesting year. We do not expect a wholesale program of vaccinations against COVID-19 until at least the middle of the year. The broader global economic recovery is likely to continue, but it will be patchy, and the risk of COVID-19 flare-ups and subsequent restrictions will remain.

Debt capital markets will be lively places with more debt on both a corporate and national level coming to market.  The FX markets should see a weaker USD bias reinforced given the level of USD liquidity injected by the Fed, and the risk for even more inflated equity valuations will remain.

Nicholas Kabaso

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