Markets retraced from the positive/reflationary trade in Asian and early European levels, but we can’t speak of complete turnaround. European and US equity markets trade just below water surface at the time of writing. Putting things in perspective: they are still near recovery (Europe) and all-time (US) highs. US yield shed up to 1 bp across the curve while German yields lose up to 1.5 bps. Brent crude manages to sustain the break above the August top ($47.31/barrel). The US dollar is still in dire straits with the greenback being drawn back to key support on a trade-weighted basis (91.75 YTD low), against the euro (EUR/USD 1.1920 November high) and against the yen (104 zone). The EMU eco/event calendar was empty with US data releases including a new rise in weekly jobless claims (778k; highest since mid-October) and positively surprising durable goods orders for October (both headline and core). They didn’t impress (US) investors though who are eye-balling the US long Thanksgiving weekend.
UK Chancellor Sunak presented his spending review to the House of Commons today. The updated GDP forecast for this year is an 11.3% GDP contraction with the UK economy only returning to its pre-pandemic level by the final quarter of 2022. Next year’s growth forecasts stands at 5.5% of GDP. It would be the deepest British recession in over three centuries. The UK government expects the unemployment rate to peak at 7.5% in Q2 2021, before retreating to 4.4% by the end of 2024. Sunak promised no return to austerity in coming years even with underlying debt expected to hit 97.5% of GDP in 2025-2026. Most public sector pay rises will be frozen and overseas aid minimized, while focusing on infrastructure spending. Fiscal spending programmes mean the UK is forecast to borrow some 19% of GDP this year, a peacetime record. The Office for Budget Responsibility warned that without brexit (trade) deal, GDP won’t return to pre-crisis levels until well into 2023 with the unemployment rate peaking at 8.3% instead. In that respect we recorded comments by EC President von der Leyen today who indicated that coming days would be decisive for trade negotiations. “There are still three issues that can make the difference between a deal and no deal”, she added. Von der Leyen specifically referred to the enforcement mechanism for securing common high standards on labor and social rights, the environment, climate change and tax transparency. Fishery and subsidies are the other two likely struggles. Sterling moved further away from the EUR/GBP 0.8864 support level, changing hands above 0.89 currently. We hold our view that sufficient good news is discounted at current sterling rates.
Departing monetary hawk Mersch said he expects the timeline of the ECB’s PEPP and TLROs to be extended at the December meeting “since the consequences of this pandemic have a longer duration than foreseen (…) in the summer”. He pushed back against broadening the range of securities (eg fallen angel bonds) targeted by the buying programmes tough. Mersch leaves the ECB after the December meeting. He will be replaced by the head of supervision at the Dutch central bank Elderson, who expressed support for the ECB’s loose policy stance.
The European financial markets regulator (ESMA) on Wednesday confirmed that EU investors wanting to trade in multi-billion derivatives market segment cannot do so on London-based platforms after the UK leaves the EU end of this year. They would have to use platforms inside the bloc or in non-EU countries (such as the USA) which have been granted financial “equivalence”.
Norway will maintain its most recent coronavirus restrictions for at least another three weeks before assessing whether they can be lifted or not, its PM announced today. Early in November, the country shut theatres, cinemas and banned bars and restaurants from serving alcohol, causing many to close altogether.