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Markets rally on hopes for a Biden recovery plan

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  • President-elect Joe Biden will release the vast majority of Covid-19 vaccine doses to speed up delivery, his team said on Friday, reversing the Trump administration policy of holding back second shots

  • London mayor Sadiq Khan declared a ‘major incident’ and warned the spread of coronavirus in the city was now ‘out of control’

  • The EU will double its supplies of the BioNTech/Pfizer coronavirus vaccine, as it seeks to quell the blame game over the slow rollout of jabs

First monthly loss of jobs in US since April

Amid the shock of the assault of the US Capitol on Wednesday it was easy to overlook the other significant development of the day: wins in the Georgia Senate run-offs mean Democrats will control both houses of Congress, making it possible for president-elect Joe Biden to push through his agenda, including a new coronavirus recovery plan.

A Biden stimulus could mean more direct payments to Americans, an extension of the jobless benefits due to end in March and more help for local administrations. Some analysts expect stimulus worth another $600bn on top of the $900bn agreed late last year. Incoming Senate majority leader Chuck Schumer said increasing aid money to $2,000 for each citizen was “one of the first things we want to do once our new senators are seated”.

Global markets welcomed the end to the uncertainties created by the long general election and expectations that the new government would put more support into the economy. Longer-term goals for the Biden administration include increased spending in infrastructure and clean energy, paid for by higher taxes. 

Line chart of MSCI World price index showing stocks in developed markets have set a new record high

But if anyone thought the task ahead was straightforward, they would have been quickly disabused by today’s disappointing employment report, which showed the US economy losing jobs for the first time since April as a resurgent coronavirus continued to be a major drag on the country’s recovery, especially in sectors such as leisure and hospitality.

The latest medical data further underline the scale of the challenge ahead: rising cases and hospitalisations over the Christmas period culminated yesterday with a death toll of more than 4,000 — the deadliest day of the pandemic so far.

Markets

New York-based Element Capital, one of the world’s biggest macro hedge funds, gained almost 19 per cent during 2020, and is returning $2bn cash to clients. The move is the latest attempt by a top fund to slim down or limit investor access after a profitable pandemic performance.

Senior editorial columnist John Plender warns of the danger to markets of being driven principally by economic policy and sounds the alarm on growing levels of debt. “Investors’ most pressing financial concern should be the reality that the world economy is hostage to debt and wayward monetary policy,” he writes. “There will, in the end, be a reckoning.”

Global debt has soared to top $270tn

Reasons to be fearful: Many investors may be glad to see the back of 2020 but has the optimism engendered by the arrival of vaccines gone too far? Markets editor Katie Martin ponders this and other reasons to remain cautious in the year ahead.

Business

Demand for computer chips and flat panels, turbocharged by the shift to homeworking and online learning, fuelled a jump in quarterly profits for South Korea’s Samsung. US west coast editor Richard Waters warned that pandemic tech bubbles carried stark reminders of the dangers of the dotcom era such as the rise of special purpose acquisition companies and too much money looking for a home. “Much like squeezing a balloon full of water, the excess cash in the system is causing bulges that are becoming impossible to suppress,” he writes.

Strong food sales over Christmas helped balance some of the pain caused by store closures for large UK retailers such as Marks and Spencer and Sainsbury’s, helped by robust online business. One analyst said the latter’s year-on-year increase in ecommerce capacity was “an amazing advancement” and noted that “this route to market is now demonstrably profitable, something for sector sceptics to note”.

How seriously will the pandemic force us to rethink and revalue the way we work? Supporters of “alternative hedonism” advocate more balanced lives with reduced workloads and more time for cultural and community activities that can improve self-esteem and wellbeing.

Global economy

There were mixed signals on the state of the eurozone recovery. Germany recorded strong manufacturing and export performances in November but retail sales across the bloc were worse than expected, albeit tempered by encouraging data on jobs. The European Commission’s economic sentiment survey showed the mood picking up in December thanks to good news on vaccine approvals.

Line chart of index (rebased) showing eurozone retail sales have stumbled

India forecast an economic hit of 7.7 per cent for the year to the end of March, the biggest in almost 70 years. Private forecasters expect a bigger shrinkage of up to 10.6 per cent, following the 24 per cent plunge in the three months to June as a result of the country’s strict lockdown.

Our colleagues at Nikkei offer their “optimists’ guide” for Asia, in 2021, highlighting the positive changes brought on by the pandemic in health, tech and the world of work.

Science

The most comprehensive study of transmission ever carried out for any disease indicated that coronavirus came to the UK mainly from southern Europe, rather than China.

Stream graph showing source of imported UK infections between January and April 2020

Some positive developments to end the week. Early tests indicate that the BioNTech/Pfizer vaccine is effective against the worrying variants of coronavirus found in the UK and South Africa, while Moderna’s jab today became the third vaccine to be approved for use by British regulators, following initial approval from the EU on Wednesday.

Have your say

Mole74 comments on Work less and be more creative — a radical prescription

I’d bet that the vast majority of people who work to excess — so that it harms their mental and physical health — do it because they have to in order to survive financially, not because they want more ‘stuff’. Cutting working hours is not really going to help them, is it? The problem isn’t how much we work, it’s how much everything (bills, transport, housing) costs and how little the average person earns. Most people are just surviving. It’s nice that Lucinda can afford to pay herself the same as one of her administrators, but not everyone has that luxury.

Please share your views with us — email us at covid@ft.com. Thanks

Final thought

The new edition of How To Spend It is a guide to feeling your very best, from the world’s top beauty and grooming destinations to meditation and turbocharging your immune system. Or as HTSI editor Jo Ellison puts it, “ideas and inspiration for anyone who’s feeling in a funk, as well as those who like to suck the marrow out of life”. 

© Klaus Kremmerz

We would really like to hear from you. Please send your reactions or suggestions to covid@ft.com. Thanks



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Markets

European markets recover after tech stock fall

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European equities rebounded from falls in the previous session, when fears of a US interest rate rise sent shares tumbling in a broad decline led by technology stocks.

The Stoxx 600 index gained 1.3 per cent in early dealings, almost erasing losses incurred on Tuesday. The UK’s FTSE 100 gained 1 per cent.

Treasury secretary Janet Yellen said at an event on Tuesday that rock-bottom US interest rates might have to rise to stop the rapidly recovering economy overheating, causing markets to fall.

Yellen then clarified her remarks later in the day, saying she did not think there was “going to be an inflationary problem” and that she appreciated the independence of the US central bank.

Investors had also banked gains from technology shares on Tuesday, after a strong run of quarterly results from the sector underscored how it had benefited from coronavirus lockdowns. Apple fell by 3.5 per cent, the most since January, losing another 0.2 per cent in after-hours trading.

Didier Rabattu, head of equities at Lombard Odier, said that while investors were cooling on the tech sector, a rebound in global growth at the same time as the cost of capital remained ultra-low would continue to support stock markets in general.

“I’m seeing a healthy correction [in tech] and people taking their profits,” he said. “Investors want to be much more exposed to reflation and the reopening trades, so they are getting out of lockdown stocks and into companies that benefit from normal life resuming.”

Basic materials and energy businesses were the best performers on the Stoxx on Tuesday morning, while investors continued to sell out of pandemic winners such as online food providers Delivery Hero and HelloFresh.

Futures markets signalled technology shares were unlikely to recover when New York trading begins on Wednesday. Contracts that bet on the direction of the top 100 stocks on the technology and growth-focused Nasdaq Composite added 0.2 per cent.

Those on the broader S&P 500 index, which also has a large concentration of tech shares, gained 0.3 per cent.

Franziska Palmas, of Capital Economics, argued that European stock markets would probably do better than the US counterparts this year as eurozone governments expand their vaccination drives.

“While a lot of good news on the economy appears to be already discounted in the US, we suspect this may not be the case in the eurozone,” she said.

Brent crude, the international oil benchmark, was on course for its third day of gains, adding 0.7 per cent to $69.34 a barrel.

Despite surging coronavirus infections in India, the world’s third-largest oil importer, “oil prices have moved higher on growing vaccination numbers in developed markets”, said Bank of America commodity strategist Francisco Blanch.

Government debt markets were subdued on Wednesday morning as investors weighed up Yellen’s comments with a pledge last week by Federal Reserve chair Jay Powell that the central bank was a long way from withdrawing its support for financial markets.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.01 of a percentage point to 1.605 per cent.

The dollar, as measured against a basket of trading partners’ currencies, gained 0.2 per cent to its strongest in almost a month.

The euro lost 0.2 per cent against the dollar to purchase $1.199.



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Yellen says rates may have to rise to prevent ‘overheating’

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US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus because of the pandemic.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.

“So it could cause some very modest increases in interest rates to get that reallocation. But these are investments our economy needs to be competitive and to be productive.”

Investors and economists have been hotly debating whether the trillions of dollars of extra federal spending, combined with the rapid vaccination rollout, will cause a jolt of inflation. The debate comes as stimulus cheques sent to consumers contribute to a market rally that has lifted equities to record levels.

Jay Powell, the Fed chair, has said that he believes inflation will only be “transitory”; the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility of interest rates rising has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued to rally.

Yellen’s comments added extra pressure to shares of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent. Yellen recently insisted that the US stimulus bill and plans for more massive government investment in the economy were unlikely to trigger an unhealthy jump in inflation. The US treasury secretary also expressed confidence that if inflation were to rise more persistently than expected, the Federal Reserve had the “tools” to deal with it.

Treasury secretaries generally do not opine on specific monetary policy actions, which are the purview of the Fed. The Fed chair generally refrains from commenting on US policy towards the dollar, which is considered the prerogative of the Treasury secretary.

Yellen’s comments at the Atlantic event were taped on Monday — and she used the opportunity to make the case that Biden’s spending plans would address structural deficiencies that have afflicted the US economy for a long time.

Biden plans to pump more government investment into infrastructure, child care spending, manufacturing subsidies and green energy, to tackle a swath of issues ranging from climate change to income and racial disparities.

“We’ve gone for way too long letting long-term problems fester in our economy,” she said.



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Senior Fed official in line to lead top US banking regulator

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Michael Hsu, a senior Federal Reserve official responsible for supervising the largest US banks, is poised to become the next acting comptroller of the currency, ending weeks of uncertainty over the US financial regulator’s leadership.

Janet Yellen, the US Treasury secretary, was set to tap Hsu for a senior post at the Office of the Comptroller of the Currency that would pave the way for him to become acting chief, according to people familiar with the matter. The timing of the announcement could not be determined.

Hsu is currently associate director of the Fed’s bank supervision and regulation division.

He has emerged as a more technocratic choice to lead the OCC compared with other possible choices with higher political profiles, such as Michael Barr, a professor at the University of Michigan and former Treasury official under Barack Obama who was a leading contender for the job. Some progressive Democrats have also been pushing for Mehrsa Baradaran, a professor at the University of California at Irvine, to be selected for the job.

President Joe Biden has not yet chosen anyone to permanently fill the post, which requires Senate confirmation. The White House declined to comment. Yellen’s decision to choose Hsu to lead the agency on an interim basis was first reported by The Wall Street Journal.

Through his role at the Fed, Hsu has great familiarity with the health of the largest banks. The mission of the OCC, which is housed within the Treasury department, is to ensure that national banks “operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations”, according to its website.

The Biden administration is expected to take a tougher approach to financial regulation than Donald Trump’s officials, amid concerns that hefty doses of fiscal and monetary stimulus flowing through the US economy as it rebounds from the pandemic is fuelling greater risk-taking on Wall Street.

Blake Paulson, the current acting chief of the OCC, was installed by Steven Mnuchin, the former US Treasury secretary, on January 14, less than a week before he left office.



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