Rally fizzles out on day one

Markets face a few tests this week

A positive start to the year fizzled out during the US session on the first trading day of 2021, as near-term risks mounted after a strong end to 2020.

Perhaps it was just relief that 2020 is finally behind us, or investors reaping the rewards of a multitude of positive risk events to end the year that delivered the early gains. Deal making from Washington to London and Brussels last month avoided multiple potential cliff edge scenarios at the end of the year which has positioned 2021 to be the year of the global recovery.

Naturally it helps when multiple Covid-19 vaccines are approved and start being rolled out. The first quarter will no doubt be tough; the spread has been horrific throughout the festive period and restrictions are being tightened and extended. The toll on the economy will be significant but, thanks to the vaccine, consigned mostly to the first quarter.

The light at the end of the tunnel is there for all to see and it grows brighter by the week. There have been setbacks – new variants, for example – which are undoubtedly a blow and there may be more. But as things stand, there’s plenty of reason for optimism this year, which will make a nice change compared to the one we’ve just slammed the door shut on. Bring on the year of the recovery.

A lot of the event risk that drove market volatility into the end of the year is now behind us but there is some hanging on in there, in the form of the Georgia Senate run-off elections on Tuesday. The two seats, both of which are up for grabs in the same state, couldn’t be more important, with a double victory for the Democrats splitting the Senate and giving them, de-facto, control.

That’s no easy task given the party’s recent history in Georgia but with Biden having flipped the state, Democrats may be feeling confident. It’s looking too close to call which, given recent forecasts, may favour Republicans but it should be a very interesting contest. And those in the markets will be watching closely as the outcome could have a massive impact on the Democrats agenda over the next couple of years.

The consensus view appears to be that a Democrat controlled Senate would be bad news for stock markets which may explain some of the negativity we’re seeing today. A case of preparing for the worst. There are obviously positives and negatives of this outcome, more fiscal stimulus naturally falling into the former camp, but it does seem a split Congress is the more market favourable outcome. We won’t have to wait long to see how true that is.

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