Stocks are on the move again with US markets breaching fresh record highs after Joe Biden was inaugurated the 46^th president of the United States. The S&P 500 yesterday added 1.4% to 3,851, propelled by a strong day for big tech as Netflix rallied 16% after a strong set of Q4 earnings that seem to bode well for its FAANG peers. The Nasdaq rallied almost 2% but gains for small caps were more muted as the Russell 2000 rose by only 0.42%. Asian markets followed the strong handover from Wall Street. European markets were a little timid, not quite picking up the baton and running with it in the same way. The FTSE 100 pushed up towards 6,780 in early trade but opening gains were pared within the first hour of the session to trade flat. Bulls are looking to build some momentum to breach the Jan 14th/15th peaks at 6,802, but reversal on Jan 15^th is proving hard to counter for the time being. Rather like watching US politics from afar and being overburdened with opinions about things that don’t really affect us, all that US stimulus is not going to make it way across the pond, directly at least.

President Biden signed a raft of executive orders, a kind of bonfire of Trumpian vanities. But the market attention right now is on whether he can get the $1.9tn stimulus package through and what else is coming over the hill by way of spending after Treasury nominee Janet Yellen said it was time to ‘think big’. Markets right now are trading on enormous amounts of fiscal support and confidence in the Fed not pulling away the punch bowl before we are all totally sozzled. The degree of stimulus delivered will depend a lot on whether Biden is conciliatory and manages to bring some moderate Republicans with him in the Senate, and whether they move to end the filibuster. Doing the latter might make the former a lot tougher. The next few days will tell us a lot about where the new administration wants to take things.

The Bank of Japan left rates unchanged as it upgraded its forecasts for the next two years. The central bank maintained its yield curve control target of -0.1% for short-term rates and around 0% for 10-year bond yields. The BoJ also raised its growth forecast for the next fiscal year to +3.9%  from +3.6% forecast three months ago, although it did point to increased downside risks from escalating lockdowns. 

We’ll also be watching the ECB meeting later today, though it is not expected to deliver much by way of a policy surprise after policymakers delivered an increase of €500bn to the pandemic emergency purchase programme. Market participants will be on the lookout for signs of concern about the pace of recovery in the Eurozone as lockdown restrictions drag on for longer than thought. Clearly, the picture has worsened since the ECB last met, but there is not a lot more Christine Lagarde and co can do for the real economy. The central bank expanded PEPP to €1.85tn from €1.35tn and extended it by 9 months until March 2022 at the last meeting and doesn’t have much ammunition left. A further cut to the deposit rate from –0.5% to –0.6% is possible but unlikely. Christine Lagarde should stress the fiscal element – getting the €750bn recovery fund out to where it’s needed is proving painfully slow. She may also comment on the strength of the euro, although the recent retreat may steer her towards not talking about exchange rates. 

Whilst stock markets push up, the situation in the real economy is more bleak. Begbies Traynor says today that the number of British businesses in ‘significant distress’ rose 13% between Q3 and Q4 2020. With some 630,000 businesses classed as such it marks a 27.5% increase year-on-year before the pandemic struck, with London businesses among the worst hit. Begbies warns this is only ‘the tip of a very large iceberg’ as they note that the pandemic has reduced court activity, limiting the number of CCJs and winding up petitions being issued against indebted companies, whilst there has been a ban on winding up petitions for Covid-related debts.

USD is a little softer again at the start of the session as cable again tests the 1.37 level – knock enough times and the door should open. GBPUSD made a fresh almost-three-year high yesterday at a little shy of 1.3720 and the bulls seem to be mustering for a breakthrough. EURUSD was steady a little above 1.21 awaiting the ECB meeting and presser. Also, watch for US weekly initial unemployment claims later – expected at 930k after a worse-than-expected reading last week saw the rate of job losses at the highest since August. Continuing claims are expected at 5.3m.

Gold is higher, breaking back above the 50-day moving average to $1,871 and look at testing the 21-day resistance at $1,876. Gold is higher with US real rates falling as breakeven inflation expectations continue to rise. More and more stimulus (more money) ought to be inflationary as the velocity of money returns later this year. Nominal rates are tailing off a bit with US 10s at 1.08% so the rally in breakevens is nudging real rates (10yr TIPS) further into negative territory. 

Chart: Inflation expectations continue to rise

Chart: Watch the MACD for confirmation