Market Watch 26.04.2021

1. Massacre of Armenians a genocide. Last weekend, President Joe Biden recognized the killing of 1.5 million Armenians by Ottoman Empire forces in the early 20th century as genocide, in a declaration that might cause further tensions between Washington and Ankara. The announcement is a significant break from past U.S. administrations, which refrained from using the word „genocide”, due to concerns over alienating Turkey, an important NATO ally and influential power in the Middle East. During the past years, Turkey has contested that the killings constitute genocide. “Each year on this day, we remember the lives of all those who died in the Ottoman-era Armenian genocide and recommit ourselves to preventing such an atrocity from ever again occurring,” Biden said in a statement on the Armenian Genocide Remembrance Day. The affirmation was not well received by Turkey’s administration, which declared that the statement might open a deep wound of the past and the U.S. President should correct „this grave mistake”. Most historians and several countries judge the killing of as many as 1.5m Christian Armenians beginning in 1915 as a genocide. However, Turkey claims that Muslims and Christians died during the chaos of the First World War and the collapse of the Ottoman Empire. Despite the affirmation, the U.S. still considered Turkey as a key NATO ally. A first call between the two presidents was held last week, and the Biden administration declared that the call could be described as a” very professional” one. The leaders agree to hold a bilateral meeting on the issues regarding NATO in June. The Turkish President has said he wanted to “turn a new page” with the U.S. and Europe, two of Turkey’s biggest trade partners, as the country seeks to attract investment in its $717bn economy and reduce inflation and unemployment.



2. €220bn to rebuild Italy’s economy. This week, Mario Draghi will unveil a €221bn recovery package for restructuring Italy’s economy, which seeks to bounce back from its worst economic decline since the Second World War. The proposed plan includes investments in high-speed rail and green energy and fully digitalising the country’s public administration, and it will be realised with the E.U.’s pandemic recovery fund. As agreed last year, Italy and Spain are expected to be the two largest recipients of the program. The Draghi recovery plan involves €30bn of Italian budgetary resources and €191.5bn of loans and grants from the Next Generation E.U. scheme. The plan is supposed to be presented to the country’s parliament at the beginning of this week and then presented in front of the European Commission. The project will focus on improving the efficiency of Italy’s electricity grid, investing in hydrogen power systems and other renewable energy sources, and improving the energy efficiency of public buildings. The investment of the E.U. funds will be focused on six areas spanning the digital transformation of the Italian economy, climate and environmental investment, infrastructure, education, health, and boosting gender inclusiveness and social inclusion. The Next Generation E.U. project requires member states to send their projects by the end of April, intending to win the European Commission’s approval and that of member states.



3. Biden makes his intentions known. US stocks sank fast on Thursday after President Biden unveiled his plans to increase Capital Gains Tax (CGT) to 39.6%. Prior to this, the CGT rate was 20%. Naturally markets, the Dow Jones in particular, felt this policy and reacting accordingly. The index sank more than 250 points with the NASDAQ and S&P 500 reacting similarly – clearly a negative for those who care for their own personal wealth. Prior to this announcement, stocks had faired relatively well, boosted mainly by a plethora of corporate earnings reports that were priced in positively. This increase in earnings was brought on by an uptick in demand, caused by the opening of the economy, notably in the states of Florida and Texas. But what does this mean going forward? Analysts are not necessarily bearish; they understand the significant rally that markets have enjoyed since March 2020, and are confident that equities are approaching their respective price targets. Yet, investors were not entirely demoralised as the S&P 500 rebounded 1% on Friday after it had had time to fully digest the policy implications of a CGT hike. However, despite it being the largest investment oriented tax of since the Golden ‘20s, investors are not timid regarding how it will affect the markets going forward. In fact UBS Global Wealth Management has found no relationship between increases in CGT and stock market performance. It is clear that the Intelligent US Investor has beaten Biden at his game of trying to startle entrepreneurialism in the United States.



4. UK Labour market on the mend. UK firms have begun hiring again as it appears the UK Labour market is repairing itself in light of reduced Covid-19 restrictions. The UK unemployment rate has averaged 4.9% over the three months to February, dropping down from 5% in January. The significant vaccine rollout throughout the United Kingdom has enabled firms to hire more workers as well, without aggravating the status quo. Some analysts feel however, that in the medium term, namely 2021, that unemployment may begin to rise again. Due to firms having reduced sales and hence profits, their financial statements will have been detrimentally affected over the past year. This could lead to these firms having to reduce costs somehow – most likely through laying off workers in a bid to prop up their financial statements. The phased nature of the UK government’s furlough scheme could negatively influence this eventuality further. Furthermore, the UK labour market has an employment gap of 6.2 million workers, if this gap is not closed by September – when the furlough scheme ends – the economy could see a massive spike in unemployment as a result. The Roadmap out of lockdown has presented an avenue for the job finding rate to increase, however, only time will be able to ascertain whether the expiration of the furlough scheme will culminate in a subsequent increase in the job separation rate.



5. ECB leaves rate unchanged. European stocks went higher by the end of last week as the European Central Bank left interest rates unchanged. The FTSE 100 gained 0.62% and the CAC 40 rose by nearly a per cent. The Governing Council agreed to keep the interest rate the same at 0% - the post 2008 liquidity trap is still alive and well. As a result, the ECB’s arm of conventional monetary policy remains disabled. Unconventional monetary policy is still on the cards. The ECB has recently upgraded its inflation forecast and has been consistent in with its bond purchasing operations in order to keep rates as level as feasible. Yet the Covid-19 risk within central Europe has raised concerns with regards to future growth prospects. Mediocre vaccine rollout, relative to the UK, has meant a lack of clarity for business owners, and thus future economic output.


Thank you to James Ballentine for his collaboration and in-depth analysis!

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