What to worry about and what not to worry about in the first trading week of 2021

This has been a strange New Year for many reasons, not only are we embarking on the start of a new UK/EU trading relationship, but there has also been a significant uptick in Covid infection rates in Europe and the looming prospect of months’ long lockdowns in the UK, Germany, France and Ireland. This has generated a worrying atmosphere as most of us start work after the Christmas holiday and shuffle down to our home offices in only a few hours’ time. But, as we step gingerly in to 2021, we have decided that the best advice we could give is to help you to sort the wheat from the chaff, below we will look at the real concerns that we should plan for and what we should not worry ourselves with at the start of this new year. 

What is not worth worrying about 

1. US election 

News that some republican senators were refusing to certify Democrat Joe Biden’s win in the Presidential election caused a flutter on twitter, but it shouldn’t impact financial markets or bother the financial community. Even though Vice President Mike Pence welcomed news that Republican Senator Ted Cruz wants a 10-day delay to the vote in the senate to endorse Mr Biden as President to audit allegations of widespread election fraud, we think this will go nowhere. The reason why traders shouldn’t worry about this, and why Mr Cruz is unlikely to be triumphant, is that the numbers aren’t there. Firstly, claims of voter fraud are unsubstantiated, second, US courts have rejected 60 challenges to Mr Biden’s win. Lastly, any delay would require a Senate vote, this is unlikely to pass since most Democrats, and a few Republicans, would be extremely unlikely to vote for it. Thus, we fully expect that the Senate will endorse Joe Biden on 6th January, and he will become President on 20th January. That date will be significant for financial markets, as it is likely to herald the end of market volatility caused by erratic tweeting by a President at odd hours of the day. President Trump’s penchant for political tweets caused more than one swoon of financial markets during his 4-years in office, which will hopefully be consigned to history later this month. Thus, we don’t think that the dollar will start acting like a safe haven any time soon, and even though it is massively oversold, we still expect more dollar downside this quarter now that the dollar index has broken the 90.0 handle. 

2. Rising interest rates 

Many people will be concerned about rising interest rates as western nations load up on debt to protect their economies from the ravages of Coronavirus and a second year of lockdowns. However, this is a problem for another year, in our opinion. Interest rates in the UK are 0.1%, they were last above 1% in 2009. We have lived with very low interest rates for over a decade, the world’s economy is in a much more troubled state now than in 2009, growth will take longer to return and there could be a double dip recession for many economies in Q1, now that the second wave of Covid is more aggressive than many governments had planned for. This is keeping interest rates low for the long term, and is also the reason why the biggest economic risk to the UK right now is that the Chancellor turns off the money taps too quickly, however, we will have to wait until the next Budget on 3rdMarch to find out if Rishi Sunak will make this mistake. Financial markets are fully expecting interest rates and fiscal policy to remain accommodative for the long haul, this is why stocks in the US finished 2020 at a record high, and why Bitcoin is also above $30,000 and has surged more than $5,000 in a week. While this type of increase is unsustainable, and we do expect a pullback, we think that Bitcoin could push higher. $100,000 at the end of 2021 is a big call, but we do think that $50,000 by summer is possible, especially if this second wave of Covid gets worse before the global Covid vaccine roll out can stop the virus in its tracks. 

3. Economic data 

This may also not be worth worrying about in the near term at least. This week starts with a torrent of data releases from Asia. China’s manufacturing report for December is expected to remain steady at 54.9, this is a decent figure considering what is going on in the world. A higher reading would likely spur even more risk taking, since global growth expectations for this year are reliant on China doing well. UK manufacturing is also expected to hold steady at a high level of 57.3 for last month, and in the US the manufacturing ISM report is expected to show a surge in new orders, which bodes well for future readings of the index. Weak sports are expected to include Eurozone retail sales, due to the increase in lockdowns across the bloc in December, and the US Non-Farm Payroll report. We will look at this in more detail later this week, but right now analysts expect a fairly dismal 100k increase in payrolls for last month, and the unemployment rate to tick up to 6.8%. However, a deteriorating employment picture only makes the Fed more likely to keep interest rates lower for longer, which is good news for risky assets as investors are likely to continue their search for yield. 

What to worry about 

1. Covid 

Since the beginning of Covid we have said that there is a risk that the second wave is fiercer and has a higher death toll than last year’s first wave. We fear that this prediction is coming true. Our basis for this prediction is the Spanish flu pandemic in 1918-1920. Back then the second wave killed more people overall, and more young people, before the disease lost some of its potency and died out after a third wave in 1920. While there have been some very misleading reports about young people being hospitalised with the virus, which we wholly disagree with at Minerva, if there are signs that younger people are dying at a higher rate in the second wave of this pandemic, here we mean those under 60, then we would expect to see some risk aversion and a surge towards safe havens. This would likely trigger a fresh record high in gold. It is worth watching gold this month, we think that it could continue to stage a recovery after rallying for most of December, which coincided with the second wave of Covid taking hold in the west. Gold has already rallied $120 in the last month and is ripe to make another attempt at $1,950 ahead of $2,000 in the coming weeks. 

2. The pound

While we continue to think that life above $1.40 beckons, GBP/USD could fall out of favour if: 1, infection rates in the UK continue to go up even with the latest round of lockdowns, 2, the vaccine roll out is delayed or slows down. We need to get to the high hundreds of thousands in the next two weeks for GBP/USD to really make traction above $1.40. Currently it is trading above $1.3650, as the good news about the Brexit trade deal continues to sink into the FX market. However, it is looking extremely overbought right now. Unless the UK can claim back its tattered reputation for dealing with this pandemic with an epic vaccine roll out, then GBP bulls may take a break in the second half of this month and $1.40 could be a tough resistance level to break.