The rise in interest rates at the long end of the yield curve has come to a halt for the time being. This probably reflects the view that the Biden Administration’s infrastructure package will be financed primarily through tax increases. If implemented, the Administration’s plans would significantly worsen the international position of the US from a tax competition perspective. The good sentiment indicators in the US are due to booming stock markets. Never before have the real economy and stock markets been as linked as they are today.

Long-term interest rates have risen sharply in recent weeks. There are 3 reasons for this: 1. due to the strongly rising government deficits, more and more bonds have to be placed with investors 2. the prospect of an end to the quarantine measures and a strong economic upswing reduce the demand for government bonds 3. rising inflation expectations. Due to the enormous debt and highly valued equities and real estate, the rise in interest rates must be slowed down. We expect the FED to take further measures soon.

Large government rescue packages are straining the capacity of bond markets to finance them. Central banks have delivered a gigantic increase in the money supply which has caused a rise in inflation expectations. Nominal interest rates on longer-term bonds have risen more than inflation expectations, leading to higher real interest rates. Given that equity and bond markets are highly valued, investors must monitor developments closely. We expect central banks will soon become even more active in combatting the rise in long-term interest rates.

In 2021 the world will get vaccinated. The second half of the year should see the start of a strong economic recovery. Democrat election victories in Georgia should result in a significantly more stimulative fiscal policy. However, expectations of a $3,000 billion package seem exaggerated due to the minimal Democrat majority in the Senate as well as the presence there of some centrist, traditional Democrats. Sooner or later, the Fed and other central banks will probably have to fight a too-rapid steepening of the yield curve in order to ensure the sustainability of government debt levels.

Significant progress on the vaccination front increases the chances that the pandemic can be ended in most countries during 2021. However, a short-term relapse into recession in countries in the northern hemisphere is no longer avoidable due to the sharp rise in case numbers. As the beginning of the resumption of “normal operation” of the most damaged industries is becoming apparent, the financial markets can see through the recession hole. Presumably, this is why the wave of insolvencies, e.g. in the tourism sector, has been able to flatten off considerably. A rotation into asset stocks and “pandemic victims” could continue.

The odds now favor the Democrats winning the next presidency, Congress is likely to remain substantially in Republican hands. Stock markets celebrated this increasingly likely election result with very strong price gains.

Parts of Europe are already in lockdown as governments fight the second wave of Covid-19. The US lags Europe in terms of the second wave but will probably soon[NP1] see a sharp rise in infection rates and be forced to implement new restrictions. Thus it is only a matter of time before additional fiscal and monetary stimulus is launched on a worldwide basis. (In the case of the US, probably “soon” after the elections.)

Poll data continue to predict a US election win for the Democrats. But the risk of there being no clear winner is high. A Democrat win should be good for infrastructure-related and climate-neutral businesses.

Thanks to extremely stimulative fiscal and monetary policies economic data are improving and stock markets are booming. Further economic recovery and a continuation of the equity bull market will need further measures of stimulus.