Monthly Outlook – February

January was a month that changed the economic outlook of the whole year, just like 2020 when the first Covid-19 cases were discovered in China. But this year’s biggest game-changer comes from the US, at least so far. Despite the busy news flow, stocks were near flat at the end but with increased volatility, gold’s average true range decline as it struggled for any direction and remained flat, dollar index is also looked confused as the price range continues to contract. In February, markets may start to decide which way to go as and if news flow slowed a little bit. 

What Happened in January?

Georgia Election and Biden’s Presidency: After so close the election two republican senators were replaced with democrats. Senate weight equaled to 50-50 and with the vice president Harris’s vote control shift to democrats by just one. This small but powerful shift means “blue wave” and blue wave usually means higher taxes and higher government spending. In line with that Biden already announced his fiscal stimulus package worth $1.9 trillion. Of course, democrats can’t pass everything and new stimulus will be hard to pass even with the majority.

Capitol Riots and Storming of Congress: Trump’s continued accusations of election fraud were dismissed by courts and even most of the Republican senators as well. But after his call, Trump’s supporters come to Washington DC and some of them stormed the congress. Biden called that day “the darkest day of American history” While this has not an immediate impact on the economy, it will affect US politics for years.

Central Banks: Central banks generally did not make big changes in their policies. FED chair Powell tried to convince investors it is too early to talk about tapering but still, fears exist in the markets. ECB chair Lagarde said she is still optimistic about recovery. BOJ will review most of its tools in the March meeting.

GameStop Mania: After Reddit’s Wallstreetbets forum’s post and short-selling hedge fund’s tweets a new short-squeeze wave hit the markets. A lot of stocks, coins, and even silver were affected directly and a lot of stock markets were affected indirectly by this wave. You can read more details in our article we posted on 26 January about this by clicking here.

Vaccine News: Vaccinations all around the world continued at a rapid pace but still it is too slow compared to original plans. More than 86 million people were vaccinated at end of January. In the US 27 million and China 23 million first doses were applied. Israel and UAE are the most closed to herd immunity with a rate of %48 and %26 of the population already vaccinated. It is unclear how Europe’s restrictions of exporting vaccines will affect the rest of the world.

In January, two good news came to attention. Both Novavax and Johson&Johnson’s third phase trials showed effective results against Covid-19 and even to UK’s strain. The bad news came from South Africa however. Nearly all of the vaccines’ effectiveness significantly less against the strain that was first seen in South Africa. The risk of mutating further and reducing the effectiveness of vaccines increasing as time passes.
IMF’s GDP Forecasts: IMF showed increased optimism about the global recovery. 2021 forecast of global GDP pulled-up to %5.5 from %5.2. US GDP forecast increased to %5.1 from %3.1

IMF’s GDP Forecasts: IMF showed increased optimism about the global recovery. 2021 forecast of global GDP pulled-up to %5.5 from %5.2. US GDP forecast increased to %5.1 from %3.1

Taper Tantrum Fears Returned to Markets

Some of the FED members said that at the near end of 2021, tapering talks may begin depending on the economic situation. CPI has been staying strong over %1 for some time and with more vaccinations and more stimulus, inflation expectations increase to above %2. With that and Biden’s $1.9 trillion worth of stimulus plans, markets start to fear of another taper tantrum is getting near. Powell tried to ease that fears after the FOMC but their efforts may fall short if expectations continue to rise over %2.

What to Expect From February?

Fiscal Stimulus Talks: Biden wants to keep his promise and pass a big stimulus package and kickstart the US economy. But he wants also to repair the politically fractured country after Trump’s presidency. So he will try everything to pass a bipartisan bill instead of only democrat. But it will not be easy. Republicans prepared a counter package worth $618 billion, much less than Biden’s $1.9 trillion. Compere to Biden’s this package excludes local government support and minimum wage and reduced the checks to $1000 from $1400 and school support to $20 billion from $170 billion. There is room for negotiations for both sides but can the two sides come close to a middle ground from such a big difference, is it going to take months or is Biden go for only Democrats bill? There are a lot of questions including will all the democrats vote in favor of a big package? In February the direction of the talks will directly affect the markets.

Covid-19:

Tight restrictions start to slow down daily new cases increase, finally. If vaccinations continue at a faster pace and the world be able to pass the first quarter with small damages, the second quarter will be the start of a real economic recovery. So the February and March will be important for keeping the cases as much less as possible and keeping the vaccinations as fast as possible before the virus mutate further.

Central Banks: February will be a lot slower than January as for central banks. RBA announced a new A$100 billion asset purchase. BOE will meet on the 4th of February, CBRT on the 18th, and RBNZ on the 24th. Bank of England will probably stay away from any big changes. After Brexit with trade deal happened, how will their opinion about negative rates may be the one of the most important aspects of this month’s meeting. CBRT probably won’t make any change and keep the rates high. RBNZ may have to change its forecasts because of high CPI rates and continue to stay away from negative rates.

Dollar Index:

The dollar index had started an uptrend every time net positioning has been this negative. Euro net positions are at an all-time high and dollar index positions are at the lowest for more than ten years while global markets shaking with a short-squeeze mania. It is almost recipe for disaster. And adding all that a bullish wedge formation formed and is currently been tested to upside. But the index may not break this month and wait for March for central banks. If the taper tantrum fears grow, a strong upward panic can happen.

You can read our detailed post here.

Gold:

Gold contracted to a small zone and still trying to figure which way to go. While stimulus and inflation expectations fueling the price, fears of taper tantrum and rising 10-year bonds limiting the upside. ETF positions are still high but flat for months, 1830-1875 level may become the key points for direction. For a more safe decision 144 and 233-day moving averages can be watched.

Nasdaq:

Nasdaq has been able to stay in the bullish trend channel after one close below it. 13000 and 34-day moving average 12910 will be important for shorter-term direction. Above this level, the trend may continue. Below near 12500 levels can be dangerous for market bulls.