Sat, Nov 28, 2020 @ 08:23 GMT
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Weekly Focus – Coronavirus Scare May Soften ECB’s Signals

Europe continues to move in the wrong direction at a rapid pace in relation to COVID-19 and now has more than 100,000 cases per day. Unfortunately, the US and Russia are also moving in the wrong direction again. India, Mexico and Brazil are moving in the right direction while the situation is under control in Asia and the Pacific. In the Nordics, Norway looks stable but there are a number of new cases in Denmark, Sweden and Finland. More worryingly in Europe, COVID-19 related hospitalisations and deaths are climbing higher (although still much lower than in the spring). We expect both to increase further over the coming weeks, as there is usually a lag between new cases and hospitalisations and eventually deaths rise as well. Politicians have started to tighten restrictions and since new cases have not come down, the bias is towards tighter restrictions at the moment. The October flash PMIs for the Eurozone showed a weakening trend in the service sector, which is most vulnerable to lockdown and widespread COVID-19 cases, but the manufacturing sector continues to hold up well due to strong demand from abroad.

The resurgence in the coronavirus pandemic and negative impact on the economy are raising calls for further policy support. While we do not expect new policy announcements from the ECB at next Thursday’s meeting, it could well send dovish signals for a December decision to increase / extend PEPP. In our view further bond purchases will not solve the subdued inflation outlook conundrum, but low yields are instrumental for fiscal policies to support the economic rebound, ECB Preview – PEPP is the signal – not the solution, 22 October. At its meeting on Thursday morning Bank of Japan is likely to downgrade its GDP and inflation forecasts but we do not expect it to change its QQE with yield curve control policy. In the US discussions about a fiscal package are still ongoing with the Trump administration and the Democrats narrowing differences on the size of the package, but struggling to find a compromise.

China continues to deal with the virus quite well and sees continuing economic recovery. This week, Q3 GDP numbers together with retail sales and industrial production further underscored the growth in the economy. One of the reasons is the very few coronavirus cases as Chinese authorities keep a tight surveillance and control measures in place. In addition, they are providing a steady stimulus, both monetary and fiscal. The Chinese currency CNY has strengthened 7% against the USD since May.

Brexit talks have resumed after the EU and the UK agreed to intensify talks aiming at a deal in mid-November (which has been our base case for a while). Over the past few weeks, there have been many news stories citing anonymous government officials stating that talks are moving in the right direction and markets welcomed EU’s chief negotiator Michel Barnier’s comments that a deal is within reach. The main issues remain fisheries and level playing field conditions (a common understanding on corporate taxation, state aid, workers’ rights, environmental standards etc.). EUR/GBP is now trading in the lower end of the recent 0.90-0.92 range but we do not think the cross will move below 0.90 until we get more positive signals that a deal is in sight.

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