But sentiment changed abruptly when former President Donald Trump banned travel from most of Europe and the World Health Organization officially declared Covid-19 a pandemic on March 11.
The most recent: many of the 2020 brands are still evident – and not just in confinements, social detachment and work at home. The exuberance that has defined stock markets in the past 12 months has continued to push stocks to historic levels this year.
The coronavirus is still with us, but investors are now betting on a quick and strong recovery as vaccine launches intensify and the United States prepares for another huge stimulus package.
Goldman Sachs predicts a 7% growth in US GDP in 2021, a level not seen since 1984.
Big risk: as in the past year, equity investors may be underestimating the size of potential obstacles. Ironically, an expanding economy may not be good for stocks because it can increase companies’ financing costs and steal stocks from their main selling point: superior returns.
While a strong recovery is good for corporate profits, higher rates make debt more expensive, which can become a problem for companies that took out heavy loans during the crisis. Stocks also seem relatively less attractive when bond yields increase.
Stay calm: the Federal Reserve has made it clear that it is willing to tolerate higher inflation if it means that companies are recovering and unemployment is declining.
Given that the US labor market still lacks about 10 million jobs since the pandemic’s arrival, it may take some time for rates to rise from the ground up.
“The outlook will remain favorable for equities in 2021,” London & Capital chief equity officer Roger Jones told me. “The long-term structural headwinds for inflation – demography, technological advances and high levels of debt – are stronger than ever. In addition, stocks can handle inflation as long as it is not sustained above the 3-level level. %, “said Jones.
The European Central Bank may have a new problem
A sustained increase in consumer prices may seem very distant in Europe, where economic activity remains severely constrained by blockages, the stimulus is limited and the prospects for GDP growth this year have weakened.
Despite all this, inflation has risen in the region and, if bond yields continue to rise, policymakers may be forced to act.
What’s happening: The European Central Bank will meet on Thursday and investors will want to know how it is thinking about inflation. They will also want some assurance from ECB President Christine Lagarde that the central bank has no plans to restrict financing conditions.
“The ECB will mainly try to minimize the recent increase in bond yields, calling it a small magnitude, driven by technical factors and focusing on real yields,” wrote ING head of research Carsten Brzeski in a note on Friday.
Brzeski expects the ECB to emphasize that asset purchases can be increased if necessary and to move the anticipated stimulus in the coming weeks to maintain favorable financing conditions.
See here: In an interview last month with The Economist, Lagarde said the ECB used about € 800 billion ($ 955 billion) from its € 1.8 trillion ($ 2 billion, pandemic) emergency purchase program. 1 trillion).
“We still have a lot. If we need everything, we will use everything ”, he added.
Still, as recent volatility in the bond markets indicates, a lot can change in a few weeks. Once economies reopen, a sudden rush for goods and services can drive companies to raise prices. Excessive savings in Europe will also spur recovery if families spend part of that extra money.
“Once the restrictions are lifted and the fear of the virus eases, it is reasonable to expect prices to rise,” wrote ING economists, including Brzeski, in a note last week. “Eurozone headline inflation could easily accelerate above the magical 2% level this year.”
General picture: at least for now, Europe’s economy appears to be a long way from overheating. GDP contracted again in the last three months of last year amid new blocks and, with many of these measures still in place, growth is unlikely to do much better in the first quarter.
The slow release of the vaccine and the relatively modest stimulus will also weigh on Europe’s recovery. In the absence of an increase in wages, the ECB is unlikely to react to short-term movements in inflation, Brzeski said.
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Friday: US PPI and consumer sentiment, EU industrial production