US markets extended their rebound for the fourth day in a row yesterday, as the recent fallout from last week’s Reddit inspired sell-off faded further. Improvements in US economic data, along with the prospect of further fiscal stimulus, have helped underpin this week’s recovery, raising expectations that the momentum shown in the January ISM reports can be sustained into the rest of the first quarter.
Markets in Asia have had a similarly good week, with the Nikkei 225 posting its best weekly close in over 30 years. Reports that Apple is seeking a partner to develop an electric car sent Japanese and South Korean automakers surging, with the likes of Mazda, Nissan, Mitsubishi and Kia seeing strong gains.
This week’s market performance in Europe has been slightly more subdued largely down to uncertainty about the speed of Europe’s vaccine rollout plan, however that hasn’t stopped the DAX from closing in on its recent record high. The FTSE 100 has had a more subdued week lagging behind due to disappointment over this week’s earnings announcements from the likes of BP, Royal Dutch Shell and Unilever, which have acted as a drag, along with a stronger pound.
On the plus side it’s been a decent week for the UK banking sector, as a combination of higher yields and optimism over the UK’s vaccine rollout pushes the likes of NatWest Group and Lloyds to three-week highs.
Today’s European open has been a slightly subdued affair with the auto sector higher with Renault getting a lift on the Apple electric car story due to its links with Nissan.
Insurance and underwriting firm Beazley’s latest full-year numbers have painted a picture of a difficult year, with the company posting a $50.4m loss, largely as a result of large claims in respect of Covid-19, of $340m. These claims were mainly in respect of global events and hospitality which have been badly affected as a result of the pandemic. Despite the losses the shares have risen in early trading on the back of a 19% rise in gross premiums and after management expressed optimism about a return to paying a dividend.
Today’s main focus is on the latest US jobs report for January, with optimism rising that today could see the losses seen in the December non-farm payrolls report reversed. Seven consecutive months of job gains came to a shuddering halt at the end of 2020, as the US economy shed 140,000 jobs. Coming on top of a similarly negative ADP payrolls report, a few days before the December numbers pointed to a US economy that appears to be recovering from an output point of view, but where the jobs market is labouring behind by quite a significant amount.
Consumer spending, which has been a big part of the US economy has stalled in recent months, reflecting the uncertain economic outlook for a lot of US services jobs, which bore the brunt of the December losses. In the absence of further fiscal support for the US economy, on top of the $900bn passed at the beginning of the month, it is going to be very difficult to determine whether the December print was a one-off or part of a broader slowdown that might be difficult to reverse. We should get an indication of that later today, but the omens look promising that the December decline may well have been a one-off.
Earlier this week the ADP report for January saw 174,000 jobs added, more than reversing the -78,000 number seen in December. Weekly jobless claims have also continued to come down from their early year surge to 965,000, coming in at 779,000 yesterday, while the latest ISM reports have shown fairly decent employment components this week as well. This bodes well for a positive number in the region of 150,000 later today, which would be welcome news at a time when the overall unemployment level remains on the high side, relative to 12 months ago, when we were at 3.5%.
The unemployment rate has still fallen sharply from its peaks last April of 14.7%, to 6.7% at the end of last year, however, this disguises the fact that the participation rate has also fallen sharply to 61.5%, from 63.4% at the end of last February. The reason this is important is because the participation rate reflects the number of people who have more or less given up looking for a new role, and as such understates the actual number of people who are probably out of work. A more accurate measure is probably the underemployment rate which currently sits at 11.7%, which is still below the April peak of 22.8%, but still well above the low which we saw at the end of 2019 when it was at 6.7%.
The rise in virus cases, hospitalisations and deaths across the US is no doubt playing a part in the slowdown in the US economy, with weak demand over the Thanksgiving and Christmas break weighing on US economic activity. As we look ahead to the next few weeks and months, and the rollout of the US vaccine programme, today’s number could dictate how quickly US policymakers come forward with the next stimulus package. A decent number could embolden the more fiscally conservative members on Capitol Hill to push back on the $1.9trn headline number outlined by President Biden a few weeks ago.
In among all of the wrangling on Capitol Hill it has almost been forgotten, that despite the falls in the unemployment rate seen since last year’s peaks, we’ve only seen the recovery of just under 11m jobs, compared to the loss of the 21.5m jobs which were lost in the months of March and April last year.
The pound has had another decent week, hitting an eight-month high against the euro, after the Bank of England left rates unchanged, while also ruling out in the short-term at least, the prospect of negative rates. The central bank didn’t entirely rule out the prospect, telling banks to prepare for the prospect of them in the next six months, however it is becoming increasingly apparent that aside from the practicalities of actually implementing them, they will not be needed, and that the central bank is blowing smoke.
All being well, the UK vaccine programme will also be much further advanced, and the various restrictions will have also been eased significantly. The gilt market reaction also speaks to this expectation with UK 10-year yields hitting a 10-month high, as hopes of an economic recovery in the second part of 2021 gained traction.
The US dollar has also had a decent week, hitting two-month highs on rising expectations that the US economy will outpace that of Europe with the euro sinking across the board, as it becomes increasingly apparent that the EU’s botched vaccine rollout will delay any recovery there.
It has also been a decent week for oil prices, hitting their highest levels in over a year on expectations of higher demand, at a time when OPEC+ restrictions threaten to eat into supply. The biggest concern now is that these higher prices could act as a brake on any recovery, as lockdown restrictions start to get eased. With businesses likely to be looking after every penny or cent, these sorts of higher costs could well stifle any recovery when it comes later this year.
On the company front GameStop saw further declines yesterday, falling another 42% after a 60% decline the day before as the Reddit trade continued to come crashing down.
Johnson and Johnson shares are likely to be in focus after the company requested emergency FDA authorisation for its Covid vaccine.
Peloton shares could come under pressure after the company revealed it was having trouble keeping up with demand, despite reporting Q2 revenue rose 128% to $1.06bn, and subscriptions rose 134% year on year.
US carmaker Ford also surprised the markets with a quarterly profit, paving the way for management to announce that they would be ramping up investment in their electric vehicle investment, as they looked to respond to this week’s announcement by General Motors to go zero-emissions by 2035.
Tesla has announced that it is recalling 36.1k Model S and X vehicles in China due to issues with a eMMC card.
Snap shares could also come under pressure after management warned on various tech changes and interruption in ad spending could impact on its future growth prospects.