Financial markets started the year 2021 on a mostly positive note. However, a few cyclical markets showed some weakness after catching up in Q4 of the previous year. The riots in Washington D.C. left a stunned global community and led to the second impeachment trial of former President Donald Trump, who had even incited his supporters to this act of occupation. Twitter and other social media giants subsequently blocked Trump's social media accounts. The Senate elections in the US state of Georgia turned out contrary to forecasts. Both Senate seats went to Democrats and thus US President Joe Biden has the congressional majority behind him, which should make his government work easier. The simple majority is not enough, however, for the big bills planned, such as the $1.9 trillion Corona aid package outlined by the Democratic administration. It is likely to be weeks, if not months, before the final aid program is in place. A substantial part of this budget is likely to flow into renewable energies - the market has accordingly anticipated quite a bit here (see FOCUS). The central banks did not announce any change in direction of the ultra-expansive monetary policy on the first official interest rate decisions.
Global stock markets closed mixed in January. The stock markets of China and Hong Kong finished strongest, while European peripheral markets such as Spain, Portugal and Italy suffered losses. A short squeeze in the stock of Gamestop, a U.S. operator of consumer electronics stores, attracted attention as private investors positioned themselves against a hedge fund, putting the latter under severe pressure. The stock jumped from USD 18 to at times close to USD 500. Other shares with a high short float also experienced similar movements. The private investors organized themselves via an internet forum (reddit.com), a phenomenon never seen before on such a scale, which should also wake up regulators. Volatility rose sharply at the end of the month. The VIX index shot up to over 37 at times. Equity markets in Europe saw similar jumps in volatility - the V1X rose to over 35. In addition to the expected clearing of euphoric investor sentiment and market positioning in January, the liquidation sales of hedge funds that had to cover their short bets probably contributed to the increase in volatility.
Yields on global government bonds rose slightly in January. The main markets in Europe continue to yield negatively. This is unlikely to change until inflation picks up significantly and central banks are forced to change course. However, we are still several months or even years away from such a scenario. However, in view of the high level of government spending, the consumption backlog and Corona-related restrictions, as well as the expected jump in growth, there is every reason to believe that prices will rise. This is likely to be reflected in further increases in inflation expectations.
Cyclically sensitive commodities such as gas, oil, iron and nickel rose between 8-10%, implicitly sending positive signals for global economic growth. Gold lost almost 3% since the beginning of the year, whereas silver gained a good 2% at the end thanks to the reddit.com community. The USD was slightly stronger against many currencies. We see this as a normal countermovement after last year's weak phase and do not expect a sustainable trend reversal.
Investor sentiment at the beginning of the year was very euphoric, which was accentuated again in January. We were therefore temporarily somewhat cautious and very selective in our equity investments. The interim correction at the end of January confirmed our expectations. We realized part of the hedges and sold put options and bought back futures. We expect the positive underlying tone in equities to continue thanks to the main drivers on the fiscal and monetary policy side. The market is broadly supported but is likely to start to show cracks in market breadth as it strengthens in the coming months. This would be a first indicator for us to reduce risks somewhat again. We recommend maintaining an overweight equity allocation and taking advantage of volatility changes for reallocations and hedging adjustments.