Weekly View - The triumph of experience
With age comes wisdom and arguably facing today’s challenges benefits from a good dose of the latter. At 78, President Biden is the oldest to assume the position of US Commander in Chief and last week at the age of 43, Tom Brady was named MVP after his National Football League team won the Super Bowl. Mario Draghi, Italy’s prime minister as of last Saturday, will turn 74 later this year. He has a large support base, both at home and abroad, which should be supportive of peripheral spreads. Despite Italy having had more than 130 governments in 160 years, we are currently positive on Italian over Spanish bonds, especially after Sunday’s election win by Catalonia’s pro-independence parties.
One challenge that has certainly impacted both public policy and spectator sports is the covid pandemic and last week the race between infections and daily vaccinations against it continued. US CPI inflation numbers came in lower than expected, despite the rents component rising at a national level. This is because core CPI is biased by metropolitan numbers. Urban prices are moving in opposite direction to national levels, allowing the Federal Reserve to hold monetary policy steady and remain dovish. Indeed, tapering of the US quantitative easing programme will not be a 2021 story. This should be positive for risk assets. Furthermore, with Donald Trump’s second impeachment trial behind us, the Senate can move its focus to the US fiscal package. Foreign-exchange rates will be impacted by the composition of US stimulus and because the US package is income focused, it is unlikely to lift the greenback, which is why we are negative on the US dollar.
Q4 earnings reports continue to come in better than expected, allowing market valuations to come down. Capital expenditure is expected to improve by six percent this year, which will support growth as well. However, in fixed-income markets, the “recovery trade” is negatively impacting sovereign and investment-grade credit markets. On a year-to-date basis, only high-yield bonds are showing positive performances. While a risk-on sentiment prevails, there is a delicate balance to be found between optimism and the possibility of disappointment.