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.