The year started with mixed economic data showing a short term hit due to pandemic-related restrictions in most western countries, while China enjoyed a strong fourth quarter. The rapid roll-out of COVID-19 vaccines in the US, UK and Israel as well as more gradual roll-outs in other countries and the prospect of more fiscal stimulus amid continued monetary accommodation gave reason to look beyond the short term pain.
The month also saw declining political risk. In spite of the incident on Capitol Hill in early January, President Biden was sworn in as planned, leading to hopes of a less volatile political environment. The UK and EU transitioned surprisingly smoothly into the post-Brexit trade regime with feared freight disruptions at the border not materializing on a large scale.
Global equity markets ended the month with marginally negative returns. A strong start to the 2020Q4 earnings season and the prospect of the economic recovery gaining pace later in the year were weighted against pandemic-related setbacks. Adding to this were valuation concerns of which investors were reminded later in the month when a number of single stocks saw astronomical short term gains after coordinated investing activity by retail investors1. The ensuing ‘short squeeze’ destabilized equity markets as a whole in the last week of January, which led to the marginally negative returns for the month. The CBOE VIX volatility index increased as a consequence from 23 to as high as 37 intra-month and ended the month at 33, the highest level since October 20202.
Global government bonds also had negative returns over the month as inflation expectations put upward pressure on nominal yields in major regions. This also led to negative returns for duration –heavy investment grade credit. High yield on the other hand had marginal positive returns due to their lower duration and yield-seeking investors continuing to buy the sector that is expected to benefit from a pick-up in global growth. Emerging market debt fared poorly over the month due to weakness in Latin America.
Mercer's Monthly Market Monitor provides an overview of global financial markets.
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