Markets were very quiet this week. Global stocks were flat but bond prices in the UK and the US traded a little lower (prices and yields are inverted, so this meant bond yields were a little higher).
With respect to the virus most of the news this week was positive. Daily rates of change in infections have been low and the big question is how economies will deal with reopening. This will become clearer over the coming weeks and investors think that markets will react accordingly in line with how the virus develops and depending on what news emerges on the treatment and vaccine front.
However, after being focused almost singularly on the virus for the last few months, other things are starting to matter as well. In the US, the presidential election and China bashing will become more important for markets in the coming months. This week President Trump lashed out at a group of Republicans – yes, you read that correctly – seeking to defeat him in November. Trump’s outburst came in response to a new video released by the Lincoln Project, a super PAC launched by disaffected Republicans. The group’s minute-long video paints a dark picture of a country fighting a pandemic under Trump’s leadership and its title is a play on former President Ronald Reagan’s famous 1984 campaign advertisement: “Morning in America.”
According to the Real Clear Politics poll of polls, Biden is polling at 48% and Trump is at 42% but the fight for the White House has not yet started in earnest, as the election will take place in November. Unfortunately for markets it appears that both parties will find it in their interest to bash China. According to the Pew Research Center only 25% of Americans now have a favourable view of China compared to almost 45% in 2016, whilst 65% have an unfavourable opinion of China compared to roughly 45% in 2016. Given that most of last year was spent worrying about the China/US trade deal it would be a shame if this topics moves back front and centre of the action so this is one thing investors should watch closely.
In Europe, attention should be given to the spread between Italian and German government bonds, which has moved higher this week and is a clear measure of financial stress within the Eurozone. This week, Germany’s constitutional court stunned lawyers and legal scholars by partially rejecting a 2018 ruling by the European Court of Justice that ECB bond buying was legal.
The euro fell, taking Italian bonds in its tow. The legal decision could limit the ECB’s ability to deliver on its pledge to help the euro area through the pandemic. This issue will not resolve itself in weeks but over months or years but it has moved higher on the list of things to focus on.