Take Five: The great reflation


FILE PHOTO: A trader at the New York Stock Exchange works as markets continue to react to the coronavirus disease (COVID-19) inside of the NYSE in New York, U.S., March 18, 2020. REUTERS/Lucas Jackson/File Photo

One trade is gripping markets in the early days of 2021: reflation – nowhere more evident than in bonds, where U.S. 10-year Treasury yields topped 1% on Georgia’s Senate runoff results.

Betting on a fiscal boost under President-elect Joe Biden, investors pushed the 10-year TIPS breakeven inflation rate above 2% for the first time since 2018. Euro zone long-term inflation expectations are near one-year highs.

But COVID-19 is raging and economies gripped with stricter economic lockdowns and fast-spreading variants. Can a pick-up in prices be sustained? Euro zone December inflation was unchanged at -0.3%, pulling the bloc’s bond yields back down. Only one side of the reflation debate will be proved right.

Graphic: Reflation trade: will it stay or go?


A volley of parting shots in the direction of Beijing will have investors holding their breath until Jan. 20, when U.S. President Donald Trump hands over the keys to 1600 Pennsylvania Ave.

Since November, audits have been forced on to Chinese firms, trade restrictions have expanded as have bans on transactions over Chinese apps and on investment in Chinese companies, leading in turn to index removals.

China has responded angrily but without action; Biden has stayed silent. The worry is things sour further. Market nerves are evident in the gyrations in Chinese telcos amid the New York Stock Exchange’ double backflip over their listing status as well as in Alibaba and Tencent shares on speculation that bans could be extended to them.

Graphic: China ADRs vs. H & A shares

3/ BANKS KICK OFF Banks kick off the U.S. corporate earnings season in earnest with JP Morgan, Citigroup and Wells Fargo posting fourth-quarter results on Friday – the first S&P 500 companies to report for that period.

Bank stocks have been on a roll as breakthrough COVID-19 vaccine data encouraged hopes of a potential economic reopening over coming months. Since early November, the S&P 500 banks index has soared some 37% against an 8% rise for the overall benchmark. Earnings for financial companies are expected to have dropped 6.6% in the fourth quarter against a 10.3% drop for S&P 500 companies overall, according to Refinitiv data as of Dec 31.

Graphic: U.S. Bank stocks soaring


Upcoming Chinese data, from inflation and trade to credit and money supply numbers, should confirm Beijing dialled back on most of its pandemic-period easy-money policies by December.

The People’s Bank of China says monetary policy in 2021 will be targeted and flexible. Debt forgiveness and cheap money will be available for small firms. The recent string of corporate defaults also shows the economy is deleveraging.

Rate cuts are over, analysts say, but policy won’t be tightened abruptly. Subtle tightening is already underway via the yuan, up 7% against the dollar in 2020, but even there the central bank has signalled it doesn’t want any excesses. -China’s central bank says it will make policy flexible, targeted in 2021-

Graphic: China TSF, GDP and markets


Global merchandise trade will rebound by 7.2% in 2021 after shrinking by a tenth last year, the World Trade Organisation predicts. The uptick is already evident in shipping rates, container traffic volumes and freight indexes.

Recent data bode well. U.S. imports are almost back to pre-crisis levels, German November exports rose for the seventh straight month and Taiwan’s December exports hit record highs. Figures from China on Thursday and the euro zone on Friday will show how their trade fared towards the end of 2020.

Pandemic-related medical gear and goods linked to remote working dominate exports. Chip sales have led export growth in bellwether South Korea. This has also upped demand for copper, iron and other raw materials, benefiting African and South American exporters.

Good news for global GDP, which is closely linked to trade and forecast to expand by more than 5% this year.

Graphic: Trade and growth

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