As the tug of war between coronavirus suppression and stimulus-induced economic recovery plays out within developed countries, Chinese aggression is pulling the political tone in a darker direction. Just as Joe Biden is set to take stage, the choices of his predecessor are slowly boxing him. Even in the proffered hand of EU diplomatic engagement, Biden faces a severe narrowing of his political approach towards alienated and aggressive China.

Looking purely at economic data from last week, world growth prospects seem to be holding steady–and even improving marginally–which suggests the manifold government stimulus efforts are having some effect. Early in the week we saw a massive spike in New Zealand Retails sales and substantial improvements to Australian Purchasing Manager Indices (PMIs) for both Manufacturing and Services. Over the next few days, a similar pattern emerged from the US as both PMIs showed massive gains. With a split result coming from the UK and EU, where manufacturing continues to register improvements and the service sector continues to decline. Considering a number of economies have tough virus restrictions in place, this is not a bad outcome. In our view, it even suggests that post-lockdown the service sector might be in for a more dramatic rebound, provided employment protection schemes remain in place while vaccination efforts are rolled out.

That’s the good news out of way. The bad news is in the form of a revelatory shift in Chinese Foreign policy, in response to Donald Trump’s combative stance towards trade and the complete shutdown of US-Sino security cooperation. What started as a tit-for-tat counterclaim to Trump’s less credible barbs has taken on different tone, in response to a demand from Australian government officials to investigate the source of the coronavirus. In the latest series of escalations, a Chinese Foreign Minister spokesman posted a computer-generated image on Twitter of an Australian soldier holding a knife to the throat of an Afghan child. 

Clearly this degeneration into blatant threats and slander does not set a constructive scene for the entry of a moderate US President-elect seeking to retrieve US political leadership on the international stage. Not all relationships have moved in a negative manner, although those that remain constructive clearly register the increasing international tension. EU officials have extended an olive branch towards the President-elect to work towards a revival of the transatlantic partnership. An 11-page document outlines cooperation on a wide array of topics such as digital regulation, Covid management, and countering Chinese aggression. This signals some clear sky on the horizon, but the clouds are there in spades as well.

Bottom line: Even a request for engagement contains within it a trade-off for Biden. By taking the proffered deal he will need to minimize the anti-China elements in order to preserve policy flexibility towards the eastern ascending power. Unfortunately, the tone of Chinese communication suggests a careful acceptance would be viewed in the least generous light, and serve to exacerbate the situation. Donald Trump’s approach to politics will not end with his personal decline, with pandora’s box still open. The market response to political signals are classically non-existent; it is both too vague and nuanced a thought to directly impact on asset pricing. Instead, the Dollar continues to decline in line with an increase in risk appetite, spurring money flows towards international markets. In the context of the existing pattern, the operative question is how far can Covid recovery be priced in before the event itself manifests. Brent Crude might be a shooting star that guides our way this Christmas, having pulled back from a rather optimistic $50 barrel handle.

The week ahead

GBP

Last week, the trade-weighted Sterling Index ended its five-week run in the green. It failed to break the 1.34 figure against the US Dollar and dipped back below 1.12 against the Euro where we open this week. The Pound remains vulnerable to Brexit headlines in what could be the final week of negotiations and the main sticking point of fishing rights remains unresolved. November month-end flows could dominate Sterling price action early in the week, and then we wait until Friday 4^th December – the date EU sources claimed to be the last date for talks to conclude in order for European Parliament to ratify a deal.

• Tuesday’s Nationwide House Price Index is expected to show 0.2% growth in November, slowing from 0.8% on October.
• On Tuesday, Markit’s final Manufacturing PMI reading for November is expected to be unchanged from previous estimates at 55.2.
• Thursday’s final readings of Markit’s Services and Composite PMI are expected to be unchanged from previous estimates at 45.8 and 47.4 respectively, indicating a contracting UK economy during the November lockdown.
• On Friday, Markit’s Construction PMI is expected to read 52.0, indicating expansion in the sector in November.
   

EUR

The trade-weighted Euro Index climbed 1% last week, edging closer towards the 1.20 figure against the US Dollar, which we briefly saw in the interbank market back in September 2020. November month-end flows could dominate price action on Monday, ahead of some key European economic data and comments from ECB President, Christine Lagarde, throughout the week. Lagarde previously stated Euro strength has added downward pressure on prices, causing a headache for policymakers who are battling negative inflation in the Eurozone. The discussion could emerge again soon as the Euro continues to move higher on Monday morning. Last time, the Euro retreated following the comments of concern.

• On Monday, Germany’s preliminary CPI reading for November is expected to read -0.7%, a sharp decline from 0.1% last month. The year-on-year figure is expected to read -0.2%.
• Tuesday’s final reading of Markit’s Eurozone aggregate Manufacturing PMI for November is expected to be unchanged from previous estimates at 53.6, indicating growth in the sector.
• On Tuesday, Eurozone CPI for November is forecast -0.3%, down from 0.2% in October. The year-on-year figure is expected to remain negative at -0.2%, a slight improvement from last month’s -0.3% annual inflation figure.
• German Retail Sales are expected to show 1.2% growth in October on Wednesday, improving from -2.2% in September.
• On Thursday, the Markit’s Eurozone aggregate Services and Composite PMI figures are expected to show contractions in November at 41.3 and 45.1 respectively.
• Friday’s German Factory Orders are expected to show 1.5% growth in October, increasing from 0.5% in September.
   

USD

The dominant theme of a weaker US Dollar continued last week as its trade-weighted index reached its lowest level since April 2018. The move coincided with GBP/USD approaching the 1.34 figure and EUR/USD closing in on 1.20, which could be tested again this week if month-end flows prove to be significant. Federal Reserve chair, Jerome Powell, will be speaking throughout the week ahead of a busy economic calendar which is expected to show a continued US economic recovery, despite a deteriorating COVID situation in the US.

• Monday’s MNI Chicago PMI figure for November is expected to indicate expansion in the Chicago area, albeit lower than October’s 61.1 reading.
• On Tuesday, ISM’s Manufacturing figure for November is forecast 58.0, down from 59.3 in October but still indicating strong expansion in the sector.
• Wednesday’s ADP Employment Change figure is forecasting 420k new jobs created in November, up from 365k in October.
• Thursday’s Initial Jobless claims is expected to read 765k, slightly lower than last week’s 778k figure.
• Also on Thursday, ISM’s final Services PMI reading for November is expected to read 57.6, slightly lower than previous estimates of 57.7.
• Friday’s Non-Farm Payroll figure is expected to show 500k new jobs in November, down from 638k in October while the Unemployment Rate is expected to read 6.8%, down from 6.9% last month.
• Friday’s final reading for Durable Goods Orders in October is expected to be unchanged from previous estimates at 1.3% growth.

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