New year, old issues

Looking at news headlines, the Christmas holiday wasn’t much of break for financial markets. Starting with the US, Congress finally approved the long-awaited fiscal stimulus package over the festive break, but election fraud claims which seemed to have settled down emerged again, as Trump tried to strong arm Georgia officials into a coup. In the UK, it looks as if another national lockdown could be on the horizon, while we simultaneously boost our inoculation efforts, with the first recipients of the Oxford/AstraZeneca vaccine receiving their dose this morning. Meanwhile, the Organisation for Economic Cooperation and Development has warned governments to rethink spending constraints; echoing the usual central bank stance for more fiscal support.

Most of us thought President’s Trump’s attempt to swing the election was over when the electoral college certified the results for Joe Biden’s victory in mid-December. However, over the weekend, Trump held a phone call with Georgia’s Secretary of State in which he tasked him to ‘find 11,780 votes’, the amount needed to win the state. Trump was recorded pressuring the Secretary of State Brad Raffensperger, into helping change the outcome of the election, but despite applying pressure, the official refused.

Not only that, some short-sighted Republicans, like Ted Cruz, have formed a clique of Trump supporters in this recent attempted coup. This week, Georgia is holding its run-off elections in which the narrow fight for two state senate seats will decide whether Republicans still hold a fractional majority or whether the US has all turned blue. 

The UK is facing one of the most challenging times since World War II. Not only is the UK’s coronavirus containment effort one of the worst among its European peers, but there’s also been the added uncertainty of Brexit to concern residents. Despite Brexit concerns lessening which would ordinarily offer a reprieve and return to normality, the severity of the new viral spread is forcing the government to consider implementing tighter restrictions. Areas such as London, which are already in Tier 4, are being considered for a new, tighter restrictions.

At the end of 2020, the market was in a position of risk-on, where market participants tend to sell safe assets and gravitate towards riskier assets. Perhaps this turn of events is not unwarranted given the 11th hour Brexit deal and additional US stimulus measures, but the bar for supposed safety is steadily getting lower. One of the biproducts of the post-2008 quantitative easing period is that the market has felt government support of asset prices—via the so-called distributional effects that favour wealth holders over labour—knowing that central banks would step in to backstop investors against downturns.

The OECD came out today to support the central banker’s message that fiscal policy needs to take the baton. The reason is two-fold: central banks have used up much of their ‘ammunition’, but also fiscal policy is distributed according to the drafter’s intent, lending a democratic element to support measures. It also means that fiscal policy can address the inherent regressive nature of quantitative easing and provide greater support to labour, which has been left in the cold since 2007.

Bottom line: The market experienced little down time over the festive season. However, right now, the market seems to favour tangible assets; oil is retesting December highs and precious metals are repairing towards 2020 highs. Meanwhile, global stocks are still rising towards all-time highs, despite any fundamental valuation basis for the move.

The week ahead

GBP

After several weeks of choppy price action, Sterling ended 2020 on a high after a UK-EU trade agreement was reached in the final stages of the year. The Pound opens 2021 testing the 1.37 figure against the US Dollar but remains over 2.5% off 2020 highs which were reached before the pandemic. Now that Brexit fog has cleared, greater focus is likely to be placed on the economic consequences of restrictions in response to the new virus strain which is rapidly spreading around the country. More recently, PM Johnson alluded to even tougher restrictions to come which could provide headwind for the Pound benefiting from Brexit euphoria.

  • Monday’s final reading for December Manufacturing PMI came in at 57.5, beating expectations of 57.3.
  • Wednesday’s final December reading of Services and Composite PMI is expected to read 49.9 and 50.7, also unchanged from previous estimates.
  • Thursday’s Construction PMI for December is expected to show strong growth in the sector for the sixth month running at 54.7.

EUR

The trade-weighted Euro Index finished 2020 8% higher after the Euro’s yield disadvantage against other major currencies disappeared, almost overnight, at the beginning of the pandemic. In recent weeks, a continued slide in the US Dollar has helped push EUR/USD to new highs, clearing the 1.23 figure briefly just before year-end. Last week, the ECB re-iterated they are closely monitoring the Euro’s appreciation since it adds downward pressure on prices – a force the central bank has battled against for years. Furthermore, European economies continue to fight against the virus with strict lockdown measures, inflicting economic damage during the first month of the year.

  • On Monday morning, the Eurozone’s final reading of Manufacturing PMI for December came in at 55.2, slightly missing expectations of 55.5, with the area’s major economies all experiencing growth in their sectors.
  • Tuesday’s preliminary reading of French CPI in December is expected to read 0.4%, up from 0.2% in November.
  • Wednesday’s final Services PMI reading for December is expected to read 47.3, with Germany leading the way with growth in the sector but other major economies experiencing contractions.
  • On Thursday, Eurozone preliminary CPI for December is expected to read 0.4%, up from -0.3% in November.
  • Friday’s French Industrial Production for November is forecast -4.9% growth, down from -4.2% in October.

USD

The broader theme of a weaker US Dollar may continue throughout 2021 after already falling nearly 13% on from its peak in March on a trade-weighted basis. On the first trading day of 2021 the US Dollar Index extends nearly three-year lows ahead of a busy economic data calendar this week. Federal Reserve members will be speaking throughout the week and the Federal Open Market Committee meeting minutes will be released on Wednesday evening providing detailed insights into the Fed’s last policy announcement of 2020.

  • Monday’s final estimate for December’s Manufacturing PMI is 56.3, slightly lower than previous estimates of 56.5.
  • On Tuesday, ISM Manufacturing for December is expected to read 56.6, down from 57.5 in November but still indicating strong growth in US manufacturing.
  • Wednesday’s ADP employment change is expected to show 50k new jobs created in December.
  • Wednesday’s final Services PMI for December is expected to be unchanged at 55.3, indicating strong growth in US services for a fifth consecutive month.
  • Thursday’s ISM Services PMI is expected to show growth at 54.5, slightly lower than 55.9 previously
  • Friday’s Non-farm payroll figure is expected to show 50k new jobs created, mirroring Wednesday’s ADP reading while the Unemployment rate is expected to tick higher to 6.8%.

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