Going “The Extra Mile”

Risk assets ended last week on a soft note as Brexit uncertainties intensified amid a lack of progress towards a transition deal.  However, news overnight was a little more promising, as PM Johnson and EC President von der Leyen agreed to “go the extra mile” to try to agree up on a deal.  “Incremental” progress has reportedly been made and talks could now continue up to Christmas.  Sterling (GBP) rallied on the news and further gains are likely on any deal.  However, gains may prove short lived, with markets likely to focus on the economic difficulties ahead of the UK economy.  A no deal outcome is likely to result in a much sharper decline in GBP, however.

Progress towards fresh US fiscal stimulus progress faltered leaving US equity markets on shaky ground.  As it is, US stocks have struggled to extend gains over December after a stellar month in November and in recent days momentum has faded further.  Last week 9 out of 11 S&P sectors fell, suggesting broad based pressure.  Whether it is just a case of exhaustion/profit taking after solid year-to-date gains – for example, Nasdaq is up almost 38% and S&P up 13.4%, ytd – or something more alarming is debatable.  The massive amount of liquidity sloshing around and likely more dovishness from the Fed this week, would suggest the former.  

At the same time the US dollar (DXY) and broader BDXY are down almost 6% and 5% respectively, this year and most forecasts including our own look for more USD weakness next year.  Some of this is likely priced in as reflected in 27 straight weeks of negative aggregate USD (vs major currencies) positioning as a % of open interest (CFTC). The USD looks a little firmer this month, but gains are tentative and like equities this could simply reflect profit taking.  For example, in Asian currencies that have performed well this year such as the offshore Chinese yuan (CNH) and Korean won (KRW), fell most last week, partly due to increased central bank resistance. 

This week is a heavy one for events and data.  The main event on the calendar is the Federal Reserve FOMC meeting (Wed).  The Fed could include new forward guidance stating that quantitative easing (QE) will continue until there is clear-cut progress toward the employment and inflation goals.  The Fed may also lengthen the average maturity of asset purchases. Central bank decisions in Hungary (Tue), UK, Norway, Indonesia, Taiwan, Philippines (all on Thu), Russia, Japan and Mexico (all on Fri) will also be in focus though no changes in policy are likely from any of them.   On the data front China activity data (Tue), Canada CPI (Wed), US retail sales (Wed), and Australian employment (Thu) will be main highlights.

US Fiscal And UK/EU Brexit Discussions

The worse than expected US jobs report on Friday failed to stop the S&P 500 from registering another record high, but it does put even more pressure on US legislators to agree on a fiscal stimulus deal.  US November non-farm payrolls came in at 245,000, below the 460,000 consensus expectations and while the unemployment rate dropped to 6.7% from 6.9% previously this was all due a drop in the participation rate.  In other words the fact there are less people registering as actively looking for jobs has flattered the unemployment rate. Payrolls growth has slowed sharply and there are still 9.8 million more unemployed compared to February while further COVID restrictions point to more weakness in jobs ahead.  The good news is that some form of compromise is emerging on Capitol Hill, with a bipartisan proposal of $908 billion gaining traction, though frictions remain over aid to states and local governments and liability protections for businesses.

This week is crucial for Brexit transition deal discussions. The weekend phone call between UK PM Johnson and European Commission president von del Leyen made little progress on outstanding issues including fishing rights and level playing field.  Irish PM Martin noted that talks were on “a knife-edge”. European Union leaders are looking for a deal to be agreed upon before the European Council meeting on Thursday though time is running out.  The lack of progress is weighing on the pound (GBP), which took an initial dive this morning before recovering somewhat.  As it stands, the UK will leave the EU on December 31 with or without a deal.   Further complicating matters the UK’s Internal Market Bill, which gives ministers power to rewrite parts of the original Brexit divorce deal, will return to parliament today.

This week’s data and event slate is likely to kick off with upbeat Chinese November trade data; both exports and imports are likely to record healthy increases (Bloomberg consensus: exports 12.0% y/y, imports 7.3% y/y). The data is likely to bode well for risk sentiment, and for Chinese and Asian markets today.  Policy rates decisions in Canada and Europe will be of interest, especially with the European Central Bank (ECB) (Thu) likely to deliver a further easing.  Bank of Canada (Wed) is unlikely to reveal any major changes to policy.  Inflation data in China (Wed) and the US (Thu) are likely to reflect the disinflationary impact of COVID. Finally, the EU Leaders’ Summit may sign off on any Brexit agreement assuming there is one by then while an agreement on the EU Recovery Fund is unlikely to be reached.  

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