Market Update from the Global Asset Allocation Team – January 2021
A tumultuous 2020 came to a close on a positive note amid optimism that the distribution of safe and effective vaccines will revitalize the economy in 2021. While the pandemic intensified at year-end, investors opted to look through the rampant outbreak towards the post-vaccine economy, while the deluge of policy stimulus also underpinned sentiment. Indeed, after several weeks of wrangling, U.S. lawmakers managed to approve a $900 billion fiscal relief package that will be critical in bridging the gap until widespread vaccine rollout. Meanwhile, the U.K. and European Union unveiled a historic post-Brexit accord at the 11th hour, which formally completes Britain’s separation from the bloc more than four years after the referendum.
Global equity markets extended their upward momentum through December, with the MSCI All Country World closing-out the year at an all-time high. Regionally speaking, gains were widespread across the globe. The S&P 500, Nasdaq, and Dow Jones Industrial Average all ended the year at record levels, while Canadian and international stocks also participated in the risk-on move. Emerging market stocks led the global charge and climbed to the highest level since 2007, with China’s benchmark rising to a five-year high as economic data revealed a vigorous recovery in the world’s second largest economy.
Bond markets took their cue from the improved global growth trajectory and the prospect for increased U.S. fiscal spending, which saw investors ramp-up their expectations for inflation and pushed the long-end of the curve higher throughout the month. In contrast, the short-end remained pinned lower as central banks reinforced their pledges for unrelenting support. Consequently, the yield curve steepened, with the spread between the ten and two-year treasury yield hitting a three-year high at around 80 basis points.
The US dollar retreated to its weakest level since April 2018 as the favorable cyclical outlook and the ebullient mood in the marketplace sapped demand for the greenback. By contrast, the Canadian dollar traded near a two-year high as the sharp jump in crude prices buoyed the loonie, while the euro also soared to new multi-year levels. The pound strengthened to the highest since 2018 ahead of Britain’s formal exit from the European Union after 47 years of membership, with the long-awaited Brexit deal receiving approval from lawmakers in late-December.
Finally, soft dollar conditions fuelled strength across the commodity spectrum. Oil gained 7% and hovered around $48/barrel as encouraging vaccine developments raised the specter for a revival in transport demand and largely overshadowed near-term risks emanating from rising caseloads and tighter curbs on activity, while ongoing supply discipline from the consortium of OPEC producers also placed a sturdy floor under prices. Copper powered to a seven-year high as robust economic recoveries in the U.S. and China bolstered demand prospects for the world’s top consumers of the industrial metal, while gold advanced on the heels of the weaker dollar and capped the year with its biggest annual gain in a decade.