US equities have bounced back in the first week of February after retreating towards the end of last month. Health care and financials are the top-performing sectors in the NASDAQ Composite Index so far this year. Cassava Sciences Inc – the top-performing stock in the healthcare sector this year – has experienced a sharp surge in its share price in recent days following the announcement of encouraging data for its drug candidate for the treatment of Alzheimer's disease. The financial sector, especially banks, has been buoyed since November by vaccine news and the prospect of an economic upswing and, in turn, better credit conditions.

Fourth-quarter US economic data was not stellar, but steady. The US economy grew by an annualised 4% in Q4 2020. By contrast, the Euro area economy contracted by an annualised rate of 5.1% in the same period extending the recession for the fourth quarter and taking the 2020 contraction in the economy to 6.8% (source: Trading Economics). The US economic data is helping lift nominal Treasury yields primarily due to rising inflation expectations. Inflation is steadily on the rise in the US with December's annualised inflation rate coming at 1.4 – up from 1.2% in October and November.

Since recovering from its large spike in March last year, the CBOE Volatility Index (VIX) has generally been steady. The measure of stock market volatility has experienced a few short and sharp increases since then, like aftershocks of a major tremor. One such spike manifested in the last few days of January coinciding with trading activity driven by discussions on the social media platform Reddit. VIX, which spiked to around 37 on 27 January, returned to levels below 25 as of 03 February. The VIX futures curve is currently in contango up to April 2021, i.e., markets are pricing volatility to rise slightly over the next three months.

Agricultural commodities, otherwise suppressed due to several years of price weakness, have made strong gains since December. The Bloomberg Agriculture Subindex is up 5.8% this month (as of 27 January) and has outpaced the broader Bloomberg Commodity Index over the same period. Starting from a lower base, commodity prices appear to have more scope for a rebound from the prospect of lower hostility in US-China trade ties with the Biden administration taking the helm. Weakness in the US dollar, vaccine optimism in risk assets more broadly, and improved consumption particularly from China are among some of the macro tailwinds behind the sector.

Emerging market equities have outpaced both world and US equities so far in January. As of 27 January, the MSCI Emerging Markets Index is up 7.5% – well ahead of MSCI World Index (2.4%) and the S&P 500 Index (2.5%). The Chinese economy grew 6.5% year-on-year in the fourth quarter of last year. Strong Chinese economic data has continued to lift Chinese equities and, in turn, emerging market indices more broadly. Emerging markets are also benefitting from a continuously weak US dollar. Weakness in the dollar makes it easier for emerging markets to service their dollar denominated debt.

In recent weeks, the rise in 10-year nominal US Treasury yields has caught the attention of investors. Nominal yields are a function of expectations of interest rates as well as inflation. Interest rate expectations have not changed meaningfully in recent weeks – something which is reflected in relatively unchanged real yields. Instead, inflation expectations are on the rise. This is illustrated by rising breakeven inflation rates. What this means is that bond markets are currently pricing rates to remain low even as the US economy starts to recover and inflation starts to rise. Markets will be looking out for the minutes from the US Federal Reserve’s January meeting to get a reassurance that the central bank will remain accommodative in the year ahead.

Equity markets have largely maintained their positive momentum in January continuing their strong run in December despite rising Covid-19 infections in many countries. The CBOE Volatility Index (VIX) currently stands at around 27 (as of 27 January) and its futures curve is not pricing volatility to rise significantly in the coming weeks and months. Fourth quarter economic data for the US and Europe may serve as a reality check reminding markets that the economic recovery still has a long way to go.

Equity markets have had positive momentum since vaccine news took centre stage in November. There has, however, been a clear divergence in performance among the different sectors over this period. For the S&P 500 Index, energy has been the top-performing sector by far on the back of a strong recovery in oil prices. Financials are second on the list that have benefited from an improving economic outlook in 2021. The two sectors have maintained their lead so far in January. Communication services are among the weakest sectors this month largely due to the weakness in Twitter’s share price.

German Bund yields have remained largely rangebound since the second half of last year. 10-year Bund yields are currently hovering around -52bps. With Europe still caught in the grip of the pandemic and strict lockdowns in place in many countries, an economic recovery remains perilous for the next few months. Fourth-quarter gross domestic product (GDP) forecasts for the Eurozone are humbling as the pandemic has withheld economic activity from accelerating. Monetary policy from the European Central Bank (ECB) is expected to remain accommodative in the near-term.

Oil prices have continued their strong run in January adding to their gains since the start of November.  Oil prices have rallied strongly in the past two months on the expectation that positive vaccine news will revive demand, while the Organization for Petroleum Exporting Countries (OPEC) and its partner countries (combined as OPEC+) will extend their current quota into the first quarter of 2021 (instead of tapering it as originally planned). Further support to prices has come in January as Saudi Arabia has announced additional voluntary cuts to shoulder the burden of another shock to demand following the latest OPEC meeting. The de facto OPEC leader will voluntarily cut production by 1 million barrels per day in February and March. However, that is to allow Russia and Kazakhstan to increase their production over those two months, leaving OPEC production broadly flat. Russia and Kazakhstan, with cold winters, are facing an increase in domestic demand but are not expected to increase exports. Global demand, however, is likely to take another knock from the renewed Covid related lockdowns. We, therefore, believe that recent oil price gains are highly dependent on Saudi Arabia continuing to be the cutter of last resort. Given the frictions displayed between the UAE and Saudi Arabia last month, we know that this can be a precarious assumption. But for now, the bold moves by Saudi Arabia have pushed oil prices back to levels seen before the disastrous March 2020 OPEC meeting.