Markets last week

The market backdrop was defined by a couple of political cliffhangers: the US fiscal stimulus discussions and the Brexit negotiations. As the week went on without a resolution on either, the risk-on mood turned increasingly gloomy, especially on the potential UK-EU trade deal. Both UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen sounded downbeat on the chances of success by the fast-approaching year-end deadline. Over the weekend, there seemed to be a glimmer of hope as both sides were willing to resume negotiations.

This was reflected in a lower value for sterling during the week (which lost  1.6% vs. the US dollar and the euro – although it is recovering this morning), collapsing gilt yields (from  0.35% to 0.17%), lagging small company shares (the FTSE 250 was down 2.8% vs. the FTSE 100 -0.1%) but also weaker European equities.  Interestingly, though, most UK-based investors probably had a positive return during the week as the pound fell.

The US spending package was on and off during the week, buffeted by contradictory statements from both sides, despite jobless claims rising sharply again. The European Central Bank tried to wow the markets with more lending to banks, more asset purchases for much longer but failed to produce the desired market result in equities, bonds and the euro. Even the EU bazooka budget of €1.8trn with a green focus, failed to energise markets.

Yet, at the end of the week, equities ended slightly down with Asian markets doing best. Oil prices topped the US$50/bbl level during the week, one of the only sectors to remain outright bullish during the week.

The week ahead

Thursday: Bank of England meeting

Our thoughts  

The Bank of England will be in the unenviable position of announcing a potential change in monetary policy without necessarily knowing the full outcome of the Brexit discussions. The BoE has two tools at its disposal: interest rates and asset purchases (quantitative easing – QE). It is expected that they will keep their bank rate at 0.10%, despite calls for negative interest rates from various quarters. The asset purchase scheme was recently increased to a £875bn purchases target and a £20bn corporate bond target. If the UK and EU should be heading toward a no-deal Brexit, the BoE has expressed a preference for additional asset purchases rather than negative interest rates, due to the uninspiring experience with negative rates in the eurozone. When the rubber hits the road, however, we do not know which way the BoE will come down, so this will be a momentous meeting.

Thursday: US Philadelphia Fed Business Outlook Survey

Our thoughts  

The US has recently seen very strong PMIs and other surveys. The Philadelphia Fed business outlook survey (known as the Philly Fed) is known as a bellwether for the US economy, often paired with the Empire State Fed (New York State). The Philly Fed hit a pre-COVID-19 high of 36.7 in March, fell to -56.6, recovered to 30 and has been drifting lower since. The survey is expected to ease further to 20.0 this week. This should be a more meaningful economic release for investors than the US Federal Reserve (Fed) meeting on Wednesday. It is unlikely the Fed will make significant changes unless the US Congress has passed a new stimulus package which is large enough to have some impact on monetary policy (unlikely), so the surveys may move markets more than the Fed this week.

Friday: UK retail sales for November

Our thoughts   

Retail sales in the UK are reflecting the combination of the challenged high street retail sector and the booming online shopping spree. After a positive month in October, November is expected to fall due to the lockdown. Retail sales including auto fuel are estimated down 1.3% or -2.1% ex auto fuel. The year-on-year growth is expected at +5.2% including auto fuel, down from +5.8% the previous month, still a very strong outturn in light of the pandemic. The UK consumer drives the economy more than the consumer in virtually any other developed economy, so retail sales have the power to move the markets.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

More help for the eurozone from both the ECB and the EU budget fails to stir markets

The European Central Bank (ECB) will offer new long-term loans to commercial banks for longer than expected, with 3 extra rounds between June and December 2021. It will lengthen the period in which banks get extra incentives by 12 months to June 2022, vs. an estimated 6-month extension. Alongside the loans, the ECB will boost its emergency bond buying programme by €500bn and lengthen it by 9 months. It will also raise the total amount that banks will be entitled to borrow in TLTRO operations to 55% of their stock of eligible loans from 50%.

Maybe the ECB missed expectations despite its efforts. On a day when 10-year gilts were falling by 6 bps, eurozone yields were rising! The euro rose against both the USD and sterling.

Separately, the EU approved the €1.8trn budget, after the standoff with Poland and Hungary was resolved. This has been hailed as a green budget, with an increased target of cutting pollution by 2030.

The Bank of England stated that banks are strong enough to weather the double-blow from COVID-19 and Brexit, one day after they were allowed to resume dividend payments.

United States

Once again good surveys but challenging employment backdrop

Productivity: during Q3, US productivity has far outstripped unit labour costs, at +4.6% vs. -6.6%, the second quarter of large productivity gains in a row. The flip side of this, of course, is 10 million more unemployed people.

Surveys: CEO confidence increased +22.2 points in the Business Roundtable survey for Q4, rising to 86.2. The CEO Economic Outlook Survey Diffusion Index has closely tracked manufacturers’ shipments of non-defence capital goods ex aircraft during this recovery. Small business confidence declined, however, as the NFIB survey fell from 104.0 to 101.4. To be fair, the previous reading was close to the pre-COVID-19 level, so the drop may be minimal here.

Finally, the celebrated University of Michigan consumer sentiment index rose from 75.9 to 81.4 with both the current conditions and expectations components improving equally. It is still way below the pre-COVID-19 100 handle, however.

Employment: the JOLTS Job Openings rose from 6494K to 6692K. Initial jobless claims rose 137,000 to 853,000. This confirms other data showing that the labour market is losing momentum.

Inflation: the headline and core (ex food & energy) CPI (consumer price index) were both up 0.2% in November. Headline inflation is 1.2% with the core reading at 1.6%. Real average hourly earnings were unchanged at 3.2% year-on-year but real average weekly earnings rose from 4.4% to 4.7%. The PPI (producer price index), i.e. wholesale inflation, rose as well, but remained contained, at 0.8% for the headline PPI, up from 0.5% and 1.4%, up from 1.1%, for the core PPI (ex food and energy). The expected 1-year inflation from the University of Michigan sentiment survey stumbled sharply from 2.8% to 2.3%.

United Kingdom

House prices and retail sales defy the lockdowns

Housing: UK house prices surged the most since 2016 in November, rising 7.6% from a year earlier, as per the Halifax. In November alone, prices gained 1.2%. On the other hand, the Royal Institution of Chartered Surveyors said new buyer inquiries slowed markedly even though an index of prices over the past three months stayed near its highest reading since 1999 in November. A majority of estate agents see weaker sales in the year ahead.

Retail sales: BRC (British Retail Consortium) sales like-for-like year-on-year rose 7.76% in November vs. 5.2% the previous month.

Growth: October GDP data looked better than expected, with GDP growth at 0.4%, driven by manufacturing and construction. Services lagged but were still positive at +0.2%. The trade balance worsened, in particular with non-EU countries.

Europe

Surveys look forward to brightness ahead

Industry: German industrial production increased 3.2% in October, after 2.3% the previous month. Industrial production was also quite strong in France for October, up 1.6%.

Surveys: the eurozone Sentix investor confidence improved to -2.7 from -10.0. Also in the eurozone, the ZEW survey (expectations) soared from 32.8 to 54.4. Likewise, for the German survey, from 39.0 to 55.0, but the current situation was still depressed at -66.5, from -64.3.

China/India/Japan/Asia

China firing on all cylinders and Japanese machine tool orders soaring

China: the trade surplus expanded by 25%, as exports rose 21.1% in November while imports rose only 4.5%. Chinese foreign exchange reserves rose from US$3.13trn to US$3.18trn.

The PPI (producer price index) rose from -2.1% to -1.5%. Although China’s manufacturing is still deflationary, the uptick in the Chinese currency, the Renminbi, may actually void these gains. Indeed, the Renminbi climbed to US$1=RMB6.5 for the first time since 2018 and since June, it has picked up 10% vs. the USD. On the other hand, the Chinese CPI (consumer price index) fell from +0.5% to -0.5%.

Money supply was almost unchanged, still very strong (above 10% year-on-year for the M0, M1 and M2 gauges).

Japan: the Eco Watchers survey fell from 54.5 to 45.6 for the current reading and from 49.1 to 36.5 for the outlook. The leading index was a smidge better at 93.8 vs. 93.3 and the coincident index rose from 84.8 to 89.7. The current account balance rose by 47% in October.

Japanese machine tool orders soared, from -6% year-on-year to +8% in November, the first time there are positive since September 2018, fully capturing the strong global manufacturing recovery.

Oil/Commodities/Emerging Markets

Brent oil prices topped US$50/bbl for the first time since March, partly driven by the news that global inventories fell by an outsize 44 million barrels in November.