Take Five: The Great Reflation

1 / FREE BET

One trade grips the markets in early 2021: reflation – nowhere more evident than in bonds, where 10-year U.S. Treasury yields have exceeded 1% on the results of the Georgia Senate flow.

Betting on a fiscal boost under President-elect Joe Biden, investors pushed TIPS 10-year breakeven inflation above 2% for the first time since 2018. Inflation expectations at long-term eurozone are close to one-year highs.

But COVID-19 is raging, and economies face tighter economic lockdowns and fast-spreading variants. Can a price rise be sustained? December inflation in the eurozone remained unchanged at -0.3%, pulling bond yields on the bloc lower. Only one aspect of the reflation debate will be right.

Chart: Reflation trade: will it stay or disappear?

2 / BLAZE OF VAINGLORY

A flurry of gunfire in the direction of Beijing will force investors to hold their breath until January 20, when U.S. President Donald Trump hands over the keys to 1600 Pennsylvania Ave.

Since November, audits have been imposed on Chinese companies, trade restrictions have been extended, as have bans on transactions on Chinese apps and investment in Chinese companies, in turn leading to deletions of indices.

China responded with anger but without action; Biden was silent. The worry is that things are still bad. The nerves of the market are evident in the whirlwinds of Chinese telecoms operators amid the New York Stock Exchange’s double backflip over their listing status as well as in Alibaba and Tencent shares over speculation that the bans could fall apart. be extended.

Chart: Chinese ADR vs. H&A Shares

3 / BANKING LAUNCHES Banks are kicking off the US corporate earnings season in earnest with JP Morgan, Citigroup and Wells Fargo releasing fourth quarter results on Friday – the first S&P 500 companies to release for this period.

Bank stocks have been on a roll as groundbreaking COVID-19 vaccine data has encouraged hope of a potential economic reopening in the coming months. Since the beginning of November, the S&P 500 banks index has soared 37% against an increase of 8% for the global benchmark. Profits of financial companies are expected to have fallen 6.6% in the fourth quarter compared to a decline of 10.3% for all companies in the S&P 500, according to data from Refinitiv as of December 31.

Chart: US bank stocks soar

4 / RETURN TO NORMAL

Upcoming Chinese data, from inflation and trade to credit and money supply figures, should confirm that Beijing has rolled back most of its easy money pandemic policies by December.

The People’s Bank of China says monetary policy in 2021 will be focused and flexible. Debt relief and cheap money will be available for small businesses. The recent spate of corporate defaults also shows that the economy is deleveraging.

The rate cuts are over, analysts say, but policy won’t be tightened abruptly. A subtle tightening is already underway via the yuan, up 7% against the dollar in 2020, but even there the central bank signaled it did not want any excess. -Chinese central bank says it will make its policy flexible, targeted in 2021-

Chart: Chinese TSF, GDP and markets

5 / TRADE-TASTIC

World merchandise trade will rebound 7.2% in 2021 after falling by a tenth last year, predicts the World Trade Organization. The rise is already evident in shipping rates, container traffic volumes and freight indices.

Recent data bodes well. US imports have almost returned to pre-crisis levels, German exports in November increased for the seventh consecutive month and Taiwan’s exports in December reached record levels. Figures for China on Thursday and the euro area on Friday will show how their trade will develop towards the end of 2020.

Remote-working medical equipment and pandemic-related goods dominate exports. Chip sales have driven export growth to South Korea. It also increased demand for copper, iron and other raw materials, benefiting African and South American exporters.

Good news for global GDP, which is closely linked to trade and is expected to grow by more than 5% this year.

Chart: Trade and growth