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Please see investment bulletin below from Brooks Macdonald received yesterday afternoon – 10/02/2021

What has happened

After a strong start to the week, equity gains calmed yesterday with risk assets taking a pause. Technology outperformed on the margin with a slight weakness in the pro-cyclical trade, though this is within the context of the recent rally.

US Stimulus

One of the factors leading to a more subdued market yesterday was investors attempting to calculate the inflationary impact of the proposed US stimulus package. This is a big unknown as it dependent on questions such as how large the current output gap is once near-term fiscal support fades. Should US Fiscal Stimulus be ‘too big’ this may lead to some short-term inflationary pressures, but we think this is unlikely to upset the medium-term narrative of low growth and low inflation that existed prior to the pandemic. Whilst US politics is somewhat distracted with the impeachment trial of President Trump, the more important area is the progression of the Biden Administration stimulus package. The White House Press Secretary said yesterday that the latest round of stimulus would most likely be passed through a reconciliation process as tacit confirmation that President Biden is moving away from his bipartisan request. We were given several timelines for the completion of the bill via this process yesterday but late February to early March appears to be the target window.

Viral news

The good news yesterday was the increasing quantity of data from countries that are well progressed in their vaccination programme. Israel PM Netanyahu said yesterday that of the fatalities due to COVID in the last 30 days, 97% of those fatalities were people that had not received a vaccine. The UK is also nearing its target to have vaccinated the most vulnerable segments of society by 15th February, a group that has made up the vast majority of fatalities.

What does Brooks Macdonald think

When talking about the US unemployment outlook last week we spoke of the need for a goldilocks level of employment that didn’t quash hopes for either an economic recovery or the need for further stimulus. Markets are now applying this same logic to US Fiscal Stimulus hoping that the package is not ‘too big’ as to create inflationary issues. Since the Financial Crisis, governments and central banks have struggled to create inflation despite highly accommodative policies. With the US economy still suffering from the effects of COVID, and any boost to inflation through one off stimulus likely to be looked through as temporary, we suspect the risk of ‘too cold’ a stimulus is far greater than ‘too hot’.

Source: Bloomberg as at 10/02/2021

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Charlotte Ennis

11/02/2021