Last week was a hazy time in equity markets, reflected by rising volatility. The VIX – the ‘fear gauge’ tracking the price of S&P 500-linked options – shot up to 23, having steadily receded since October.

Most stockmarket indices headed down towards the end of last week, led by Frankfurt, as virus cases surged and a flurry of new lockdown measures were announced. Anxiety was also the mood prevailing on Wall Street. The S&P500 headed lower as it became clearer that a fiscal deal is unlikely to see the day any time this year. Investors also ditched some of their equity positions pending FDA clearance of the Pfizer-Biontech vaccine. More clarity over the efficacy and safety of the Covid-19 vaccines is undoubtedly needed if the equity uptrend is to get back on track.

Leading central banks have furthermore revised down their GDP projections for 2021. The Bundesbank now sees growth at 3% for Germany, while the ECB has lowered its expansion forecast to 3.9% for the Eurozone, down from 5%. Meanwhile, the Bank of Italy has cut its national growth forecast from 4.8% to 3.5%.

In general, risk aversion – stoked by the Brexit haze – has pushed up demand for government bonds. In Europe, the yield on the 10-year Bund has dropped to -0.64%. Likewise, the same-dated BTP in Italy now yields 0.52%. The yield on the 10-year bond from Portugal, which in 2011 was rescued by a Troika plan (ECB, EC and IMF working together), has fallen below zero for the first time in its history, clocking in at -0.06%, signalling the genuine shortage of profitable debt investments. This is largely thanks to the ECB, which now holds more assets on its balance sheet than the Fed, with more in store. The downswing in European sovereign yields has been phenomenal, especially in the peripheral countries, once nicknamed the ‘PIGS’ (Portugal, Italy, Greece, Spain). The ECB is due to beef up its pandemic emergency purchase plan (PEPP) by EUR 500bn to a total of EUR 1,850bn. It is also extending its intervention period by nine months, from June 2021 to March 2022. Financing terms are set to remain
favourable for a long time to come.

In the US, the Fed will issue a long-awaited update on monetary expansion policy this coming Wednesday.

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