1, Brexit talks reach crunch point
The clock is ticking for the EU and the UK to reach agreement on a trade deal before the European Parliament’s ratification vote that is due the week of the 14thDecember. Already the lack of clarity means that if a deal is reached it is too late to translate any potential agreement into the bloc’s 24 official languages. Right now, the sticking points are still fisheries, which have been an issue between the UK and the EU for decades, as well as competition issues between the UK and the EU. It appears that both sides are motivated to get a deal done. There have been rumours that the EU could delay the Parliamentary vote until closer to the end of the year in order to buy more time for the negotiations. Also, an EU official said that talks would resume remotely this week, after the EU contingent had to self-isolate due to exposure to Covid. The official said that while it is possible that Ursula Von Der Leyen and Boris Johnson could speak later this week if there is no breakthrough, the talks are not at the stage where they need leaders urging the negotiators to come up with a deal. UK Chancellor of the Exchequer Rishi Sunak also expressed his desire for a deal, however he said that the biggest risk to the UK’s economy next year is still coronavirus. The market reaction to the drawn out trade negotiations has been fairly muted so far. UK stocks are still dominated by the virus and the tug of war between vaccine hopes and rising infection rates. If the pandemic had not hit humanity in 2020 then we think that GBP volatility would be far higher than it currently is. GBP/USD has followed an upward trend this month and it is currently trading just below $1.33, which is the highest level since September. However, a breakthrough in the trade deal negotiations could see GBP/USD rise to $1.35, so if the headlines sound like a deal is close, we could see another strong performance for sterling this week. Likewise, EUR/GBP is also under pressure as the pound rallies on prospects of a trade deal before the January 1st deadline. It fell below 0.89 last week, and we may see further declines this week back to key support at 0.87 and then 0.8660.
2, Economic data to watch
We cannot stress how important the economic data is this week. At the end of the week and into the weekend it is worth watching Black Friday trading announcements from the key retailers and Amazon. In the UK we will be looking for any announcements from John Lewis, Next and M&S on their performance over the extended Black Friday this year. These announcements will also be useful to see if consumption has held up in the face of rising unemployment and a second wave of coronavirus. If we get good results, then we would expect this to be reflected in the performance of the UK retail sector at the end of next week.
Other data points worth watching include the early reading of November PMI reports, the market is expecting sharp falls for the UK and Europe due to the increase in lockdowns and suppression of economic growth. In the US, the PMI numbers could hold up better than Europe, however, lockdowns have just started to be reinstated in many parts of the US, so we may see weaker numbers in the coming months. The German IFO report for November is expected to fall, with the expectations component also dipping, suggesting that the economic outlook is darkening for Europe’s largest economy. FOMC minutes from this month’s Fed meeting are also worth watching, to see if there is any hint that further stimulus could be on the horizon due to rising infection rates and a low likelihood of more fiscal stimulus in the near future. A sign that more monetary stimulus is to come, potentially in December, would be good news for stocks and bad news for the dollar, in our view.
3, What next for stocks and commodities
Although all of the major stock markets fell last week, the decline was fairly low, and volatility did not spike. This leaves us optimistic that the second wave of coronavirus may not decimate stock markets like they did in the first wave. The vaccine news is obviously protecting stocks from deeper declines, even though there is an undercurrent of nervousness from the recent rising infection and fatality rates in the US. The news over the weekend that the vaccine could be rolled out in the US next month and in the UK from the start of next year, could also help stocks to recover at the start of the week, as the vaccine comes within touching distance. However, there is some concern that people travelling to be with family over Thanksgiving could become a super-spreader event, that may have repercussions for economic growth in December and January, before the vaccine can really take effect. Thus, the question is, if Thanksgiving does create a powerful mini surge in infections, which we won’t know for sure until mid-December, can the markets look through the short-term concern and set their sights on the longer-term positives from the vaccine. This week will be crucial to determine if the vaccine or rising infection rates in the US win out and send stocks plunging, so tread carefully.
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