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Monthly Market News December 2020 - Market trends

Johan Gallopyn - Investment Desk Analyst
2020 was anything but a 'normal' year, even if stock market performances for the year suggest otherwise. In December, the investors digested the vaccine news of the previous month.

Equity market trends: volatility

The 'normal' performances at the end of 2020 disguise the strongest stock market correction and quickest recovery in several decades, and the considerable performance variations in regions, investment styles and sectors.
Following the euphoria in the equity markets due to effective vaccines in November, December experienced a modest rise in prices. The American stock markets were, again, able to post new record prices in the past month. The weaker dollar made them, in euro terms, the weakest performing region. Investors refocused on short term uncertainties in December. In particular European stock markets experienced some volatility. Due to the increasing number of corona infections and stricter containment measures in many countries, particularly the new, more infectious strain of the virus, and the deadlock for the American coronavirus relief package, investors had some doubts about their enthusiasm of the previous month. At the same time, the healthcare workers gave the first vaccinations. In Europe a sigh of relief was heard after the long-term negotiations between the EU and the UK finally resulted in a Brexit deal. The emerging markets performed well in December as well. Latin America was the outlier in December, but the region could only make up for part of the loss earlier this year. Across 2020 as a whole, the Asian markets were the definite outperformers.
In December, the value equities could not continue their outperformance in respect of growth equities. The new corona infections put the brakes on sector rotation to cyclic values.

Bond market trends: stability

The interest rates for reference bonds in Germany and the United States were flat again. The German 10-year rate fluctuated around -0.60%, while the American counterpart hovered within a margin of a few base points, around 0.95%. However, this nominal interest stability disguises a recovery of the inflation expectations (particularly in the US) and a drop in real interest rates.
The yield spreads of the southern countries within the eurozone experienced a continued slight drop in December, thus bringing them back to the pre-corona spread levels of February at the end of 2020.
Spreads of corporate bonds remained quite stable in December as well, both for the investment-grade and the high-yield segment. The ECB shall continue to purchase investment-grade corporate bonds in 2021.

Central banks: ECB as expected

The European Central Bank extended its monetary support measures in December, in line with expectations They increased, among other decisions, the bond purchases through the emergency purchasing program for combating the corona pandemic by 500 billion euros. The purchases are extended until March 2022. 2021 will see three additional refinancing operations for banks.
The Federal Reserve slightly adjusted the guidance of its future purchasing program. The American central bank will continue its monthly purchases of 120 billion dollars "until sufficient progress has been made in achieving the employment and inflation goals".
The Japanese central bank announced that it would evaluate its monetary policy. The result is expected in March 2021 and could cause the central bank to abandon its negative interest policy because of the impact on the financial sector.

Currencies: weak dollar

The American dollar continued to depreciate in December. The improved sentiment of the financial markets is accompanied by reduced demand for the 'safe' dollar. Also,, inflation expectations in the US are higher, causing a real interest rate disadvantage with other currencies. Against the euro, the loss for 2020 amounted to 9%. But the dollar also weakened against other currencies.
The conclusion of a trade deal between the United Kingdom and the EU had little impact on the British pound, which rose slightly against the euro. However, the currency remains at the bottom of the margin in which it has been fluctuating since 2016.Mid-December, the US officially placed Switzerland on its list of countries that manipulate its currency.
The Norwegian krone strengthened slightly against the euro due to a comment of the central bank about its future interest policy. The Norges Bank focussed on the risks involved in keeping interest rates too low for too long. This policy causes financial imbalances demonstrated, for instance, by the rise in house prices in the last few months. An increase in policy interest rates is still expected to occur in 2022 but may be brought forward as a result.

Commodities: the price of copper continued to rise

The Brent oil price built on its price gain of November and closed the year just above 50 dollars per barrel. As expected, OPEC+ reached an agreement to reduce the production cuts phase-out by 500,000 fewer barrels than previously anticipated. Without the deal, the production would have risen by 1.9 million barrels per day from January. The demand for oil remains weak due to the containment measures to combat the virus.
The gold price recovered from its drop in November and ended up just below the level of 1,900 dollars per ounce. New uncertainties about corona, a decrease in the real rate (which reflects the opportunity costs for holding gold), and the weakening dollar underpinned the price.2020 was the year in which gold achieved a new historical price level of over 2,000 dollars.
For the first time since 2013, the price of copper rose to 8,000 dollars/tonne. The demand for the metal from global projects for a greener economy and the resulting electricity consumption supported the price. The other industrial metals saw a mixed price performance in the last month.
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