ASX to edge higher; Biden spend drives market momentum

After pushing 2.4 per cent higher last week, the S&P/ASX 200 Index is looking at a small 0.1 per cent gain to start the trading week.

Here is what to watch in global markets in the week ahead.

US stimulus

Market sentiment was given a major boost last week, after US Democrats won both seats in the State of Georgia’s Senate run-off, handing the party control of both chambers of Congress. The so-called “blue wave” through Congress, which up until a few weeks ago had been largely unexpected, all but assures a major increase in US fiscal stimulus, with direct payments to individuals likely to be increased from $US600 to $US2000 in the near future.

It appears new government spending won’t stop there from the Biden administration either. The President-elect hinted last week that new fiscal spending under his government would likely number in the trillions – though little detail was provided about where the spending may go.

Weakening US fundamentals

Hopes for a more robust economic recovery in the United States comes as economic data out of the country paints a mixed picture. On the plus side, US ISM PMI data showed very robust manufacturing activity in the US last month, with the survey recording its highest reading since September 2018. That strength in the business sector isn’t trickling down into the US labour market just yet, however. Non-Farm Payrolls data for December revealed a contraction of 140,000 jobs in the US economy, as the effects of slow-coming fiscal stimulus and surging COVID-19 cases weighed on employment. Market participants are maintaining the view that the softness in US economic activity will prove transitory however, with the continued rollout of COVID-19 vaccines to sustain confidence of an imminent return to economic normalcy.

Record highs

Financial markets are still pricing in a very strong recovery for the global economy. Risk-appetite is tremendously high, as hopes of a vaccine led recovery, coupled with huge amounts of government and central bank stimulus, keep money flowing into risk-assets.

Record highs continue to be made in global markets, with the MSCI World Index hitting a new high last week, underpinned by record highs record by the S&P500; while price action in Tesla, which surged 24.71 per cent, and Bitcoin, which climbed over 20 per cent, last week reflecting the market’s desire to keep putting cheap money to work. The reflation trade remains alive and well too. Inflation expectations continue to climb, benefitting small cap and value stocks, with market measures of US price growth hitting highs not seen since September 2018 last week.

US earnings season

Attention in the market will turn this week to US corporate fundamentals, as US earnings season kicks off again for another quarter. According to Bloomberg Intelligence, year-over-year earnings growth for the S&P500 contracted by -11.6 per cent in the fourth quarter, marking the fifth quarter in the last six where EPS growth has declined for the index. Despite this however, EPS growth for US companies continues to be revised higher as the economic outlook improves, with earnings expectations for the quarter increasing 2.3 per cent, according to financial data company FactSet. As always, US bank stocks will dominate the focus of the first major week of US earnings for the quarter, with the likes of Citigroup, JP Morgan and Wells Fargo reporting.

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This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG. Information is of a general nature only.