Good morning,

Markets have picked up where they left off as we get going for 2021, with an appetite for risk in stock markets and a feeling of disdain towards the US Dollar.  Investors won’t have a particularly easy time of it over the coming week though, as the usual easing back in to a New Year is going to be punctuated by the Georgia Senate run-off elections.  The polling stations close tomorrow night, but given what we saw at the election, we don’t expect this to be over in a matter of hours thereafter.

The two contested Georgia seats are currently Republican held and the polls say that they are likely to stay that way.  In the instance that one went Democrat, nothing would change and the Republican majority would still stand in the Senate, which could be seen as a positive as they are likely to keep Joe Biden’s agenda towards American businesss largely in check.  If both seats were to turn blue then there would be an even number of senators on both sides of the Senate and as such the casting vote in any dead heats falls to the vice president.  Such an outcome, though polling as unlikely, would mean the markets needing to think on what this means to the value of equities if they’re to be based on the revenues and profits that those companies generate.  A Democratic majority in both the House and the Senate would mean Joe Biden could go to town on his preferred progressive tax agenda, which theoretically would hurt post-tax profitability of companies, which in theory would mean investors wanting to reduce their exposure to these companies and therefore we could see a correction in stock markets… Though this needs to be tempered with the ‘upside’ of a two chamber majority, which would ultimately be a massive stimulus package being approved in pretty short order – which would be seen as a boost for risk appetite.

As you can see, it’s far from a clear cut case as to what the reaction would be if the polls had got it wrong and the Democrats manage to pull this off.  The stock market is up about 15% since the election and the US Dollar index is down by about 5%, so there’s certainly room for a decent correction if the market were to feel that taxes outweigh stimulus – but we’re not sure how long that would last given the backdrop of such easy monetary policy.

In the UK:  Boris Johnson acknowledged that Covid restrictions are likely to get tougher in the near future, but wouldn’t be drawn on details or timeframes.  He’s not the only European leader to suggest such things, with the Irish, German and French governments all set to extend or tighten (or both) their current lockdowns.  The rollout of vaccinations isn’t happening as quickly as many had hoped, but with more than half a million of the AstraZeneca vaccines being delivered to sites today, this week provides the government with a great positive PR opportunity if they can get the number vaccinated by Sunday into seven figures.  Matt Hancock has reluctantly accepted the assistance of 21 military medical teams, having last week apparently refused any help from the MoD – why you’d not take up the logistical expertise of the armed forces is the question that’s got me stumped? – answers on a postcard please…

Staying in the UK:  The Pound is slowly continuing to make progress in the FX market. It wasn’t the immediate jolt higher we were expecting, but there is a gentle upward trend.  What we will probably start to see now is the unwinding of risk/no-deal mitigation trades, but there will be some apprehension in doing this too soon, as these next couple of weeks will be an interesting test of how quickly businesses have got to grips with their new processes and Sterling might not be inclined to move too far whilst this is the case.

In Europe:  An interesting test for the ECB early on in the year, as a Finnish bank has decided to pay a dividend four times larger than the cap the ECB has strongly suggested. The central bank weren’t able to extend their legislation on dividend bans, but hoped that banks would play within the spirit of the continued guidelines and not pay out more than 15% of 2019 or 2020’s profits. Alandsbanken is going to pay out 59% of its 2109 profits, having had a bumper year that year.  The bank itself is small and not systemically important, but the knock-on effect could well be that other small banks feel emboldened to do similar. Bloomberg has the details.

Elsewhere:  China isn’t happy that the US has started to de-list Chinese telecoms companies that are apparently part owned by Chinese military.  Beijing has said that removing these companies from the stock exchange amounts to an “abuse of national security and state power to supress Chinese firms (and) does not comply with market rules”.  There is also concern that these de-listings will move from telecoms to oil majors that are also listed on the NYSE.  We’re not too sure that diminishing Sino-US relations is going to have much of an impact given the changing of the guard in a few weeks, but it still means a large hole for them to be dug out from when the time comes.

Today we’ll be expecting a busy day and a pretty full house of market participants. The data calendar is dominated by PMI manufacturing numbers from Europe, the UK and the US, having already seen numbers from Japan (stronger than expected) and China (weaker).

Happy New Year

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