The Week Ahead: Balancing Near-Term Fears With Medium-Term Optimism

10 and one 10 us dollar bill

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A holiday-shortened week will see dwindling participation. The lighter activity could make for either subdued price action or volatile activity. Brexit is a gift that keeps giving, and despite posturing to the contrary, neither side appears to want to be seen as the party that walked away.

After much teeth-gnashing and finger-pointing, the US still appears set to provide modest fiscal stimulus that will help overcome the cliff of expiring income support programs. The scaled-down initiative keeps the door open to a larger package next year depending on the two Senate races in Georgia. Early in-person voting for the January 5 election has already begun, and the polls and betting markets show both are tight races. 

The economic calendar in the week of Christmas is thin, but there are a few highlights. They should be understood, though, in the context that Q4 20 and the first part of Q1 21 will remain challenged by the surge in the coronavirus and social and official responses that dampen, if not reverse, the recoveries seen in Q3. As investors and policymakers scrutinize the latest economic entrails, the vaccine roll-out continues and will now be joined by Moderna (MRNA)'s vaccine. 

While the near-term tragedy continues to unfold, the optimism of a strong and sustained recovery once the vaccine propels herd immunity is running higher. When people can move around safely, pent-up demand for services will be unleashed. A boom in tourism and hospitality services, in general, is a common investment meme.

The reflation trade is being expressed in different ways throughout the capital markets. Notable in US equities has been the outperformance broader market. The Russell 2000 has rallied about 15%, while the S&P 500 and the NASDAQ have gained around 5.6% and 7.2%, respectively, since the vaccine was announced. 

The currency markets have given an extra fillip to the Antipodeans and Scandis. It also helps explain the yen's lag and the broad dollar's weakness. The JP Morgan Emerging Market Currency Index has appreciated for the past seven weeks. The Institute for International Finance estimates that emerging markets drew a record amount of portfolio capital last month of more than $76 billion.

The rise in copper to seven-year highs and soy to its highest level in four years reflects demand from China and East Asia more generally and boosts Latam. Since the Pfizer (PFE) announcement on November 9, the two strongest currencies in the world have been the Colombian peso (~6.7%) and the Brazilian real (~5.8%).

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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