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Monthly Market Snapshot: January 2021

A monthly update on equity, fixed income, currency, and commodity markets.

Views expressed are those of the authors and are subject to change. Other teams may hold different views and make different investment decisions. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only.

Equities

Global equities (-0.1%) declined slightly in January. Markets started the year supported by the bullish narratives surrounding vaccine optimism, central bank liquidity tailwinds, strong earnings growth expectations, and the potential for additional fiscal stimulus; however, equities fell sharply at the end of January amid stretched valuation and sentiment indicators, fears about the health and economic risks of virus mutations, and a large uptick in volatility sparked by a retail-driven short squeeze. The broadening rollout of vaccines and favorable news about new vaccine developments were overshadowed by the logistical challenges of distributing and administering the vaccines, particularly in Europe, where Pfizer-BioNTech and AstraZeneca announced production delays. Additionally, new virus mutations first discovered in the UK, South Africa, and Brazil raised concerns that existing vaccines may be less effective. Retail day traders coordinated on social-media platforms to cause a short squeeze that saddled major hedge funds with losses of nearly US$20 billion, inducing legal and regulatory scrutiny. US President Joe Biden unveiled a US$1.9 trillion coronavirus relief package that was met with resistance by Republicans, who subsequently proposed a smaller, more targeted package worth approximately
US$600 billion.

US

US equities (-1.0%) ended the month lower, with stocks declining sharply during the last week of January amid heightened volatility. A frenzy of day trading in dozens of heavily shorted stocks forced many hedge funds to unwind short positions and reduce their gross exposure, exacerbating pressure on the market. Concerns about lofty valuations, record equity inflows, and the swelling US budget deficit fueled anxiety about a potential bubble in some areas of the market. Despite these fears, demand for equities was supported by prominent themes such as resilient corporate earnings, easy monetary policy, and prospects for additional fiscal stimulus. Cash levels were the lowest in eight years and allocations to risk assets hit a 10-year high. Although more virulent COVID-19 variants were discovered in the US, new infections receded from recent highs amid the sluggish (but accelerating) rollouts of vaccines. The Democrats secured slim majorities in both houses of Congress after winning control of the Senate, bolstering President Biden’s prospects of advancing his legislative agenda and increasing the likelihood of…

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