Effective vaccine, better earnings spur on markets

Key points
• COVID-19 hospitalisations continued to increase globally with new strict lockdowns in the UK. However, countries have moved to fast-track vaccines to manage the pandemic. At the time of writing 24 million doses of COVID-19 vaccines have been administered across 41 countries including 7.7 million in the US and 1.5 million in the UK.
• Just before Christmas, the US approved USD900bn of additional fiscal stimulus (about 4% of GDP), much larger than the USD500bn expected by most analysts after the election resulted in a split Congress.
• The Democrats took control of the US Senate, by winning both seats at the January 5th Georgia runoff, increasing the prospect of large additional fiscal stimulus, increased corporate tax rates and further regulation.
• New Zealand Quarter 3 GDP data confirmed that economic activity has returned to pre-COVID-19 levels, consistent with high frequency activity indicators.
 

Key developments
Global equity markets were again strong over the month with the MSCI World returning 4.1% in US dollars. Unlike November, where markets saw a strong re-opening trade due to positive vaccine news, December’s gains were broader based. The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month up 2.5% while the Australian equity market (S&P ASX 200) rose 1.2% for the month (+3% in New Zealand dollar). Government bond yields moved higher (New Zealand 10-year up from 0.85% to 0.99%) on an improving economic outlook and potential re-opening of economies, whilst in currencies a weaker US dollar saw both the New Zealand dollar (+2.4%) and Australian dollar (+4.8%) stronger.  
Over recent months, markets have had to grapple with concerning headlines around COVID-19 hospitalisations, which has led to heightened mobility restrictions in Europe. These negative headlines have been outweighed by an improving longer-term picture as vaccine rollout programmes have moved into gear while governments and central banks have remained supportive. The other key variable has been the extent to which both earnings and economic data has surprised to the upside of conservative consensus forecasts keeping sentiment positive.