Markets last fortnight

Eventually, the UK and the EU signed a Brexit trade deal on Christmas Eve, which pleased financial markets. British equities surged on the first day back (29 December). Gilts were also in demand. Although UK shares softened afterwards, sterling finished the year on a high.

 Across the Atlantic, President Trump finally signed the US$900bn pandemic relief bill, which he had threatened to veto. The upcoming election run-offs in Georgia were on Republicans’ and Democrats’ minds when deciding how to vote on this legislation. A further attempt by Trump to raise the direct COVID-19 bailout payments from US$600 to US$2,000 was blocked by the Republican Senate Majority Leader McConnell.

With both political issues settled, the markets had a positive end of year period. Over the fortnight, the FTSE 250 was a strong performer, buoyed by the Brexit resolution.

On the virus front, the UK’s vaccine blitz has not been followed by other countries. The US is inoculating 200,000 people a day and many states are not using all their supplies. The Trump Administration’s goal of 20 million vaccinations by year-end has most certainly been missed.  

The US dollar resumed its downward trend, hitting the lowest level in nearly two years.

Markets in 2020

One question asked non-stop during the last six to nine months is why the stock market was so buoyant when the world was suffering under the terrible economic impact of a pandemic. The answer can be seen in the 2020 returns. Equities did well in general, but the dispersion across markets was enormous. The worst developed market was the FTSE 100, with a double-digit loss, the worst year since 2008. At the top is a tie between the US and emerging markets with double-digit positive returns. Sector analysis shows that technology dominated in a world of working from home, online shopping and home entertainment, whereas energy posted the worst losses and financials also had a negative year. The sector breakdown in every market determined its performance: the losing FTSE is heavy in energy and banks, whereas the winning US and Chinese markets are led by technology shares.

Government bonds added value to portfolios, as central banks unleashed the most accommodative monetary policy in history, bringing interest rates to the lowest in centuries in many places and pledging not to raise them again for years. US 10-year treasury yields dropped 1% to 0.9% and the 10-year gilt yield also fell 63 bps. 

Corporate bonds suffered during the initial virus outbreak but then recovered to challenge government bond returns.

Among alternative investments, gold was the shining star, rising over 25%, its best year in a decade, but copper pipped it to the top post due to the worldwide manufacturing recovery, whilst oil prices slumped over 20% on poor supply-demand dynamics and travelling restrictions.

The US dollar weakened throughout most of the year with the euro providing the best return among developed currencies, but the strongest major currency was the Chinese Renminbi. Sterling finished the year at the highest level in two and a half years vs. the US dollar but near the lows of the last five years vs. the euro.

The week ahead

Tuesday: Senate run-off elections in Georgia

Our thoughts: the high-stakes Senate run-offs in Georgia could play out like November’s presidential election, with the result being delayed for days or weeks, as legal challenges are brought in. It took 10 days before anyone projected that Joe Biden would win Georgia and the state didn’t certify his victory for another week.

Two incumbent Republican Senators, David Perdue and Kelly Loeffler, are pitted against Democratic challengers Jon Ossoff and Raphael Warnock. In principle, Georgia is a solid Republican state but with evolving demographics has managed to vote narrowly for Democrat Biden. How much of that result was due to President Trump being on the ballot, as opposed to a dislike of Republicans, is the big question ahead. Trump’s support for a US$2,000 pandemic relief payment for Americans instead of the US$600 already approved has thrown a spanner in the works. Democratic leaders have agreed with Trump but the Senate Majority leader, Mitch McConnell, a Republican, has vetoed it. This complicates life for the two Republicans in Georgia who have sided with Trump on this issue.

The outcome will decide whether President-Elect Biden governs with a hostile Senate or a friendly one. For the Democrats to be in charge, they would need to carry both seats, which is a low probability, and then Vice-President-Elect Kamala Harris would cast the tie-breaking vote, a tight situation, but nevertheless allowing Biden more power than with a Republican-led Senate.

Wednesday: UK Markit/CIPS Services PMI

Our thoughts: the UK economy has been driven by manufacturing and construction in the last few months, but unfortunately services which are the largest part of GDP have been very soft during Q4. The latest data point at 49.9 is barely at the threshold of growth and contraction and no major change to that level is currently expected. For the UK economy to recover in full, services will have to kick in and hence the next few readings will be crucial. This month’s data point may not quite reflect the Brexit deal yet, but a post-Brexit number will be a good guide on how growth will shape up for 2021.

Friday: US employment numbers for December

Our thoughts: the US economy has not managed to create enough jobs to offset the huge pandemic losses. The non-farm payrolls number matters in that respect, since jobless claims have been piling up throughout the year and more than 10 million people have officially lost their job (a number which should be topped up with those falling off the unemployment register). The last payrolls only created 245K jobs and the next reading is estimated at a much lower level. A surprise on that number may move markets.

The unemployment and underemployment levels will also be watched, but the participation rate can skew them. At 61.5% the participation rate is 2% below the pre-COVID-19 level. Another meaningful detail will be the breakdown of job creation by sector. Manufacturing and healthcare have been creating jobs and retail losing them in droves, so the sector numbers will also guide markets toward the real state of the US economy.

The numbers for the fortnight

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Pandemic relief finally approved in the U.S. 

President Trump finally signed the US$900bn pandemic relief bill, which he had threatened to veto. He did, however, veto the US$740bn defence spending bill, but both Houses of Congress managed to find the 2/3 majority to override his veto. The Republicans and Democrats in Congress were obviously positioning themselves for the Georgia run-off elections which take place tomorrow and will determine the colour of the Senate under President-Elect Biden. US Senate Majority Leader Mitch McConnell blocked an attempt by Democrats to force quick action on raising direct COVID-19 bailout payments to US$2,000 despite President Trump’s support for the increase.

Central banks did not make relevant comments over the last couple of weeks.

United States

Mixed surveys but strong house prices

Surveys: the Chicago Fed National Activity Index fell sharply from 1.01 to 0.27. The Conference Board Consumer Confidence survey likewise fell from 92.9 to 88.6 driven by a large fall in the present situation from 105.9 to 90.3, although the expectations component was slightly better at 87.5 vs. 84.3. The Richmond Fed Manufacturing Index rose from 15 to 19. The University of Michigan sentiment index was a little softer at 80.7 vs. 81.4, with the drop coming from current conditions rather than expectations. The Dallas Fed Manufacturing Activity Index fell from 12.0 to 9.7. Finally, the MNI Chicago PMI hit a strong 59.5, up from 58.2, but not as high as the September reading in the 60’s.

Housing: existing home sales fell 2.5% in November to 6.69 million from 6.86 million, although the previous reading was an all-time high. Likewise, pending home sales fell 2.6% in November. New home sales fell more sharply by 11% in November to 841K from 945K, a meaningful drop. MBA mortgage applications rose 0.8% for the week ending 18 December. The FHFA House Price Index was up 1.5% in October, vs. 1.7% the previous month. The Case-Shiller House Price Index for October delivered a strong reading, with the index up 8.41% year-on-year vs. 6.99% the previous month, whereas the narrower 20-city index surged from 6.64% to 7.95%.

Inflation: inflation was flat for November with the PCE (personal consumption expenditures) deflator and core deflator both at 0%. For the year-on-year the PCE headline was at 1.1%, down from 1.2% and the core deflator was unchanged at 1.4% (the PCE core deflator is the gauge used by the US Federal Reserve for its inflation target of 2%).

Employment: jobless claims were less than the previous week, but unfortunately do not reflect people falling off the unemployment register. Initial claims were down from 892K to 802K and continuing claims were down from 5507K to 5337K.

Other data: durable goods orders rose 0.9% in November and ex transportation were up 0.4%. The advance goods trade deficit widened in November from US$80.4bn to US$84.8bn. Personal income fell 1.1% in November with personal spending down 0.4%.

United Kingdom

Highest house price growth in 6 years

Surveys: the CBI retailing reported sales survey improved from -25 to -3 and the total distribution reported sales from -21 to -2.

Budget: public finances further deteriorated in November, with the Public Sector Net Borrowing Requirement rising from £20.9bn to £30.8bn.

Growth and trade: the Q3 GDP number was revised up to 16% but year-on-year fell -8.6%. During the quarter, the current account deficit widened from £11.9bn to £15.7bn.

Housing: the Nationwide Building Society house price value index climbed 7.3% from a year earlier to an average of £230,920, the highest growth in six years, up 0.8% from a month earlier.

Europe

Few meaningful statistics

Eurozone consumer confidence improved marginally from -17.6 to -13.9, although in Germany the GfK consumer confidence survey fell further from -6.8 to -7.3

China/India/Japan/Asia

Slightly less buoyant PMIs in China do not dent machine tool orders in Japan

China: PMIs were softer. The manufacturing PMI eased from 52.1 to 51.9 and the services PMI fell from 56.4 to 55.7, both still at historically high levels.

Japan: machine tool orders rose further from 8.0% to 8.6% year-on-year in November. The leading index was slightly softer at 93.8 from 94.3 and the coincident index was almost unchanged at 89.7 from 89.4.

Oil/Commodities/Emerging Markets

Oil and copper prices corrected during the fortnight, but gold kept its level.