Market Mondays #28

Inflation, Brexit negotiations and more...

Last week in the financial markets

· Opec and Russia agree to raise oil supply from January

· US oil producers begin to follow Europe with emissions pledges

· Brexit negotiations resumed on Sunday in Brussels, UK trade talks with EU to on a “knife-edge”

Driving forces for the week ahead

Is economic recovery all good news?

These past few weeks have brought a positive outlook on economic growth as different pharmaceutical companies from Pfizer to Astrazeneca have announced promising results from their large-scale coronavirus vaccine trials. The availability of the vaccine to the public in the near future becomes realistic, and with that comes changes in investor sentiment. 

These news, along with the appointment of Janet Yellen as new Treasury secretary as part of Biden’s administration strongly support the reopening of the economy after the pandemic. Given Yellen’s past work in the Fed, it is expected for both monetary and fiscal stimuli to comfortably continue for quite some time; as a result, interest rates aren’t expected to increase any time soon. 

What does this mean in terms of inflation?

Fast economic recovery means that a rise in consumer prices is highly likely – in other words – inflation. Consequently, the demand for inflation-protected securities has gone up, with investors looking for ways to protect their portfolios, particularly bond investors with fixed-income portfolios. To hedge against the erosion of the real value of fixed interest payments that securities provide, many investors avoid exposure to long-term yields. As a result of this anticipation, a substantially larger volume of longer-dated US Treasuries was sold off last Tuesday. 

A swap rate that measures expectations for the average level of inflation over five years, five years from now, has jumped to 2.25% — above the 2% inflation target that the US Federal Reserve has for years persistently failed to achieve.

What else we’re reading

· US states poised to sue Facebook for monopoly abuse

· JPMorgan warns of crowded trades amid markets’ clear consensus

· A rare pandemic silver lining: mental health start-ups

This week’s key events and data releases

Tuesday: Eurozone Q3 Unemployment and GDP released

Thursday: ECB policy decision from Lagarde, FDA meets to discuss Pfizer/BioNTech vaccine for possible emergency use approval.

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