Two Down, Two To Go
The month of compromise has delivered two so far. OPEC+ agreed on output targets for next year, while the EU27 gave their backing to the 2021-27 budget and recovery fund. That just leaves Brexit and U.S. fiscal stimulus outstanding, with a positive outcome in both cases making this a rather remarkable end to an extraordinary year.
U.S.
It is all about stimulus this week. Risk appetite will take its cues from the Fed and possibly from Congress. The Fed could deliver fresh measures following softer economic data and no fiscal aid from Congress. Expectations are growing for the Fed to extend the average maturity of their Treasury purchases. The risk of Congress going home for the holidays without delivering a rescue bill is growing by the day. The key sticking points remain liability protections and aid to state and local governments.
On the data front, the flash PMI readings could show modest weakness in both the manufacturing and service sectors. Both retail sales and industrial production in November are expected to decline, while housing data appears poised to steady.
U.S. Politics
The Electoral College will gather on Monday and is expected to formalize Joe Biden’s presidential victory. The focus will heavily remain on the Georgia Senate runoff-races. Democrats need to win both seats to have a split Senate, with Vice-President Kamala Harris having the tie-breaking vote. Most political experts expect the Republicans to win at least one of the races and keep control of the Senate.
EU
It’s been a very good week for the EU. The ECB announced provided fresh stimulus for the bloc as lockdowns wreak havoc on the economy once more. The 27 members signed off on the EU budget and recovery fund after Hungary and Poland dropped their opposition to it. It would have been a perfect week but for the fact that Brexit negotiations haven’t really progressed, despite face to face talks between Boris Johnson and Ursula von der Leyen.
Brexit
Neither side is willing to call it quits on talks but there’s no doubting that no-deal Brexit odds have significantly increased this week and traders are starting to feel the heat. Volatility in the pound has been on the rise and it has fallen more than 2% against the dollar this week. Leaders have pledged to make a firm decision on the negotiations by Sunday but since when do deadlines matter when it comes to Brexit? There’s only one deadline that’s set in stone (ish) and that’s Dec. 31. Still, this claim means this weekend carries heightened market risk.
UK
The economy grew at its slowest monthly pace since May in October and November is expected to be far worse as a result of the lockdown. Growth of 0.4% left the economy 7.9% smaller than it was before the pandemic and that’s before the lockdown kicked in. The Bank of England last month increased its bond buying program in an attempt to support the economy through the second wave but should no-deal Brexit become a reality, more will have to be done on the fiscal and monetary side. This is the worst time to be facing no-deal Brexit which is partly why I still believe a deal will be reached. It’s just not yet a minute to midnight.
Turkey
The lira has stabilized somewhat over the last month or so but did slide at one stage today, going above 8 to the dollar, before paring losses. The move came as the U.S. prepared to sanction Turkey over its purchase of Russian S-400 air defence systems last year. The sanction may turn out to be only minor though and, ultimately, it will soon be Joe Biden’s problem, who may choose to push back harder, regardless.
China
China stocks finished the week under pressure as the PBOC leaves liquidity tight and it is swept by a wave of corporate defaults. New sanctions on China officials and telcos by the U.S. continues to muddy the waters, with China detaining a Bloomberg reporter in Beijing this week. That will continue to weigh on China stocks, which will underperform versus Asia next week.
China’s Industrial Production and Retail Sales on Wednesday are expected to be unchanged from October’s numbers. That may escalate concerns that China’s 2020 recovery story is running out of steam, further dampening equities, although the Yuan should remain strong on liquidity and interest rate carry.
India
India releases WPI Inflation on Monday, which is expected to print at 7.20%, just above the RBI’s target of 5-7%. That will raise a glimmer of hope that the RBI will cut rates at its next meeting to support growth, despite the stagflation environment. That should be supportive of Indian equities.
PM Modi still faces massive protests over the new farmers bill, which may see the Rupee’s recent rally slow. Otherwise, events internationally will drive moves in most developing markets.
New Zealand
The New Zealand dollar has rallied strongly as a pro-cyclical recovery play for 2021. Having broken 0.7000, it now targets 0.7300 in the coming weeks. Expect more noise about the currency and the spectre of negative rates from the RBNZ if the rally continues to accelerate.
Q3 GDP on Wednesday will be old news, with markets focused on the November Balance of Trade on Thursday. New Zealand’s recovery could see exports surprising to the upside, boosting the currency. On the import side, severe port congestion could lower the headline import number.
Australia
The global commodity rally and vaccine-led 2021 cyclical recovery play have been a huge boost to the Australian dollar as a proxy for world trade. AUD/USD has risen rapidly through 0.7500 and now targets 0.7800 this week. The deteriorating relations between China and Australia continue to have no effect on the AUD or Australian equities, with Australian domestic data continuing to impressively outperform.
Talk is increasing of an Australia/New Zealand travel bubble which would boost equities on both sides of the Tasman Sea, as well as the currencies. Queensland is the latest state to announce yesterday that Kiwis can travel without quarantine. Unfortunately the travel bubbles are still asymmetric for now.
PMIs on Wednesday should show confidence continuing to increase. Key data is Employment on Thursday after October’s blow-out 179,000 job increase. November will be lower but a still respectable 50,000 jobs. Risks are skewed to another upside surprise, boosting the AUD and local equities.
As long as the global recovery trade retains momentum in international markets, and iron ore and copper prices elevated, Australian equities and the currency will remain investor favourites.
Japan
A heavy data week beckons for Japan with the Tanken survey on Monday expected to remain negative, but improve over October’s number. Balance of Trade and PMI’s follow on Wednesday, with increasing COVID-19 restrictions and concerns set to see imports fall markedly, and forward sentiment sour. That may weigh on Japan equities mid-week ahead of the FOMC decision in the U.S.
The Bank of Japan meets on Friday with rates to remain unchanged, but the Bank expected to announce an increase in asset buying and lending facilities. That would dovetail in with last week’s supplementary budget and assuming no surprises from the Federal Reserve, see Japan equities rally into the end of the week.
The MoF and BoJ will be watching the recent rally on the Japanese Yen with concern. Friday may see some currency rhetoric from the BoJ if USD/JPY has fallen to 103.00 or lower, which could see a spike higher.