How Biden’s presidency, vaccine rollouts and central bank announcements could shape a recovery.

Feb. 5, 2021 

Introduction

Global economic conditions softened at the beginning of 2021. Elevated levels of unemployment and fresh lockdown restrictions curbed spending. The reduction in demand weighed heavily on the manufacturing sector. Global manufacturing activity scaled back in January, posting a slowdown in new orders and output. A new variant of COVID-19, which is believed to be more infectious, was found in the U.K., prompting fresh travel restrictions worldwide. The travel and tourism, airline and hospitality industries suffered as a result. 

Global equity markets started the year off with gains in response to the widespread distribution of COVID-19 vaccines and the belief that they would provide a boost to global economic activity. Joe Biden’s U.S. presidential win and his proposed US$1.9 trillion stimulus plan also supported equity prices. However, stocks pulled back late in the month in response to uncertainty whether the support package would actually pass, along with volatility spurred on by a Reddit platform group and institutional short sellers. In fixed income markets, the Canadian and U.S. yield curves steepened during the month. Ultra-low policy rates from the Bank of Canada and U.S. Federal Reserve Board put a cap on short-term rates, while the yields on 10-year government bonds in both countries rose, largely in response to expectations of higher inflation and better economic conditions. 

Joe Biden’s first 100 days

Joe Biden was sworn in as U.S. President on January 20. Despite the potential for higher corporate tax rates and a tighter regulatory environment, investors were relatively bullish on Joe Biden as U.S. President. It is believed the stability he will bring to the White House and clarity of his polices and decisions may reduce uncertainty and be constructive for equity markets. Among his key objectives for his first 100 days is to help stop the spread of COVID-19, and support American households and businesses who are suffering under the weight of new lockdowns. He proposed a new US$1.9 trillion stimulus plan, along with a host of orders to help combat COVID-19. There were also two key executive orders that will likely have a big impact on Canada. First, President Biden revoked the construction permit for the Keystone XL pipeline. TC Energy Corp. immediately suspended work on the project, and announced more than 1,000 jobs would be lost as a result. Second, President Biden enacted an order on U.S. federal agencies to “buy American.” Many federal agencies are large importers of Canadian goods for their projects, and this order will likely scale back purchases. 

Vaccine supply issues

A sharp increase in cases of COVID-19 in recent months has led to widespread lockdowns and the shutdown of non-essential businesses in many parts of the world. This has weighed on global economic activity, particularly among the services and manufacturing sectors, which posted a slowdown in January. This raised concern among investors about the ongoing recovery, which put some downward pressure on equity prices during the month. The path to a sustained economic recovery will be the successful distribution of COVID-19 vaccines in 2021. While governments have initiated efforts to distribute COVID-19 vaccines as quickly and efficiently as possible, some production delays from pharmaceutical companies are impacting the quantity of doses being delivered to certain countries, including Canada. Canada had hoped to administer six million doses by the end of March, which may not be met in response to these delays. The longer it takes to receive and administer the vaccines, the more uncertainty regarding the speed of the economic recovery. A new variant of COVID-19, which is said to be more infectious, created another hurdle for the Canadian government in its ongoing battle against COVID-19. The government announced new travel restrictions at the end of January, largely driven by hopes of keeping any new variants of the virus out of Canada. This had an immediate impact on Canadian airliners, which will need to scale back flights. Business conditions across many sectors in Canada could weaken as cases of COVID-19 rise, while the government scrambles to distribute the vaccines.

Actions of central banks globally

Announcements from major central banks during the month of January took a relatively cautious tone in response to the uncertainty posed by the pandemic. The Bank of Canada (“BoC”) warned the economy could contract in the first quarter as a result of new lockdowns. The U.S. Federal Reserve Board (“Fed”) also noted the recent data showed a slowdown in economic activity in the U.S. The European Central Bank (“ECB”) raised the prospect of a double-dip recession in the region. The central banks reiterated their commitment to support their economies, and bring inflation and employment back to target, while trying to avoid the liquidity and market-related issues that plagued the global economy during the financial crisis. The potential for further easing of monetary policy provides another tailwind for equity markets, and may support higher prices. The BoC and ECB kept their key interest rates unchanged at 0.25% and 0.00%, respectively, while the Fed held the target range for its federal funds rate at 0.00% to 0.25%. Ultimately, central banks believe the economic recovery is highly dependent on the successful deployment of COVID-19 vaccines. 

Oil prices moving higher

The price of oil rose almost 8% during January, benefiting from renewed optimism that the distribution of COVID-19 vaccines will lift global demand. Oil prices suffered in 2020, largely in response to a supply glut on lower demand. However, significant production cuts from the Organization of the Petroleum Exporting Countries and Russia (“OPEC+”) and expected rise in global demand this year should reduce excess inventory. This could help stabilize the oil market, and provide a tailwind for oil prices. OPEC+ held their meeting early in January. After a few days of contentious negotiations, the group decided to maintain their production cuts into February and March. In its January Report, OPEC+ left its projection for global oil demand unchanged, predicting demand will increase by 5.9 million barrels of oil per day in 2021 over last year. This would translate to demand of approximately 95.9 million barrels per day. The Energy sector on the S&P/TSX Composite Index advanced in January. Investors brushed aside concerns regarding the impact of Keystone XL pipeline suspension, and focused instead on the more efficient supply and demand dynamic, which may minimize the downside risk on prices.