Markets last week

The Pfizer-BioNTech vaccine will start in the UK this week for high priority groups and then for other priority groups in 2021. This is ahead of the EU and the US. The EU regulators will review the vaccines on 29 December and 12 January and the FDA in the US on 10 December. The inoculation news boosted UK equities during the week.

The market mood was in thrall to the negotiations in the US Congress on a stimulus package. Republican Mitch McConnell is said to offer US$500bn and Democrat Nancy Pelosi wants US$900bn. There are rumours that the gap can be bridged, as it is much smaller than before the election. In a classic ‘bad news is good news’ twist, the miss on the November jobs report was seen by markets as raising the chances of a stimulus deal before year-end.

A spanner in the works on Brexit negotiations did not spoil the market mood, as it was perceived to be part of the bargaining bluster and grandstanding rather than an insurmountable roadblock. Sterling would obviously be at risk in a no-deal outcome.

Last week, UK equities were the strongest market, with a particular focus on small-caps, while Asia lagged. Government bond yields rose, with US treasuries the most.

Commodities rallied sharply: oil on OPEC supply news, copper still on a bullish trend and gold after bouncing back from below the US$1,800 level. Sterling was stronger vs. the US dollar but gave some ground against the euro.

The week ahead

Thursday: UK three-month GDP to October

Our thoughts  

The UK economy has been at the bottom of the growth league this year, with manufacturing and construction the only areas of brightness, as services have been hit severely. UK statistics provide us with monthly updates and, although there is a delay in the publication of the data, it will be crucial to understand how the different areas of the economy have performed in October, with the breakdown into manufacturing, construction and services. The good news on the vaccine was not yet available in October, and the further lockdown had not started at this point. After a shaky September, will October show some green shoots?

Thursday: Meeting of the European Central Bank (ECB)

Our thoughts  

One by one, central banks are adapting their monetary policy to the COVID-19 and post-COVID-19 world. It is now widely expected that Christine Lagarde, President of the ECB, will announce a large package of additional money stimulus for the eurozone. How much more quantitative easing (QE) will be provided? Although interest rates are not expected to change, will the implementation rules for these rates provide more stimulus to the banking system and hence, to the economy? The depressed eurozone will need help from the ECB and the question is how much will be given.

Friday: US University of Michigan Sentiment survey

Our thoughts  

The US consumer has benefited from a slew of additional unemployment and pandemic benefits, the net effect of which has been to allow for consumption to continue whilst giving some room for savings. Some of these benefits are coming to expiration at the end of the year and so far consumption has held up well, but the question is whether sentiment may be affected by the change in government and the expiry of benefits. This should get reflected in the University of Michigan sentiment survey. The index peaked around 100 before the pandemic, slumped to 70 and has been recovering very slowly since.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

All eyes on a Congress stimulus deal

In the US Congress, Nancy Pelosi (House of Representatives Speaker) and Chuck Schumer (Senate Minority Leader) backed a US$908bn stimulus proposal as a framework for new talks with the Republican Party, dramatically slashing their pre-election demand for a US$2.4trn package. The concession puts the ball in Mitch McConnell’s court (Senate Majority Leader) to reach a deal by year-end. The latest indications are that Mr McConnell might be willing to accept a US$500bn package but President Trump seems to be willing to back the US$908bn deal, so the chances of an agreement seem to be improving.

United States

Jobs miss improves odds of fiscal stimulus package

Surveys: the ISM manufacturing PMI was still strong though slightly lower, at 57.5, with new orders (65.1) and production (60.8) both enjoying their fifth month above 60. 16 out of 18 industries reported growth. Prices paid at 65.4 showed that companies have pricing power. Inventories are very low which gives a lot of room for growth. Export and import orders are still expanding.

The Markit services PMI rose from 57.7 to 58.4 and the ISM services index fell from 56.6, to 55.9, both very strong levels for the services sector.

Housing: MBA mortgage applications fell 0.6% after a 3.9% rise the previous week.

Employment: initial jobless claims fell from 787K to 712K and continuing claims fell from 6089K to 5520K, although the Thanksgiving week might have impacted the data and also some people are falling off the unemployment register after exhausting their entitlement to benefits.

November non-farm payrolls fell from 610K to 245K, the smallest total since April, below estimates, with private payrolls at 344K down from 877K. In a sign of the times, transportation and warehousing added 145,000 workers whilst retail employment fell by 34,700.

Unemployment fell from 6.9% to 6.7% with the labour force participation rate lower at 61.5% from 61.7%, which offsets the drop. Underemployment eased from 12.1% to 12.0%. Average hourly earnings rose 0.3% for the month or 4.4% year-on-year.

United Kingdom

Mortgage approvals at a high

Housing: mortgage approvals jumped to the highest since before the financial crisis in October as buyers rushed to take advantage of tax incentives. The Nationwide house price index rose 0.9% in November, adding up to 6.5% year-on-year, the fastest pace since 2015.

Credit: lenders approved 97,532 loans in October, the most since 2007. Net consumer credit fell by £590m as households paid down debt, mostly on credit cards.

Surveys: the Markit/CIPS services PMI unexpectedly rose from 45.8 to 47.6.

Europe

Differences between countries in surveys

The eurozone manufacturing PMI was upgraded from 53.6 to 53.8, with Sweden soaring to 59.1 and the Netherlands rising 4 points to 54.4, while Spain fell below 50 at 49.8, Italy down from 53.8 to 51.5, Germany was almost unchanged at 57.8 and France improved from 49.1 to 49.6.

The Markit eurozone services PMI was slightly better at 41.7 vs. 41.3, still in depressed territory. Retail sales for the eurozone rose 1.5% in October or 4.3% year-on-year, an improvement after a negative previous month.

German industrial production increased 3.2% in October, after 2.3% the previous month.

China/India/Japan/Asia

Chinese surveys at highs and exports soaring

China: the manufacturing PMI rose to 52.1 in November from 51.4 the previous month. That was the highest since September 2017 and above estimates. The pick-up in manufacturing orders was driven by strong domestic demand as well as an export boost. The Caixin manufacturing PMI also rose from 53.6 to 54.9. Trade indicators also strengthened, with the PMI’s sub-indices tracking export and import orders both rising from October.

The non-manufacturing PMI climbed to 56.4 from October’s 56.2, exceeding forecasts. The Caixin services PMI rose from 56.8 to 57.8, a very high level.

The Chinese trade surplus expanded by 25%, as exports rose 21.1% in November while imports rose only 4.5%.

Japan: the Jibun manufacturing PMI rose marginally from 48.3 to 49.0. The services PMI rose too from 46.7 to 47.8. The jobless rate rose from 3.0% to 3.1%. Construction orders and housing starts recovered by a little.

Oil/Commodities/Emerging Markets

Oil boosted by OPEC+ output announcement

OPEC+ agreed to a small production hike in January of 500,000 bbl. The oil market will therefore get a 1 million bbl increase rather than the originally planned 1.9 million bbl, with reviews of the output levels every month. This was positively received by the oil market with crude prices up 2%, reaching a 9-month high. Gold fell below US$1,800/oz at the beginning of the week and then bounced back to finish the week near US$1,840.