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Weekly Focus – Rays of Light in Europe

While Europe is seeing rays of light in getting the second COVID-19 wave under control, the situation in US is worsening fast. Many European countries now see a turnaround in new infections and this week France joined the club with a big decline in new cases. Italy is finally showing signs of stabilisation but the level of new cases is still high and pressure on hospitals significant. In the US, there is an acceleration in new infections and record-high hospitalisation rates. More and more states are tightening restrictions and more are likely to follow suit in our view.

The new waves of the virus have so far taken their toll on the European economy. This week’s euro area PMI and the German ifo survey revealed that business confidence in the service sector in Europe has fallen, as restrictions are especially targeting bars and restaurants and the retail sector. In contrast, European manufacturers overall continue to buck the negative trend, also visible in stable export expectations. Both manufacturing and service companies remain optimistic that the crisis will fade with the prospects of a roll-out of vaccinations early next year according to news from pharmaceutical companies.

The US economy so far is holding up despite escalating virus infections and new restrictions. November PMIs for services continued higher (57.7 from 56.9) along with manufacturing (56.7 from 53.4). The most upbeat parts were job creation and orders, with the order to inventory-ratio at 2018-highs. Next week the US ISM (Tuesday) should either be unchanged or slightly down based on the PMIs released this week. Also watch out for the jobs report on Friday. In China we get the official PMIs on Monday and the private measure on Tuesday with both measures expected to be holding up quite well despite early signs of withdrawal of monetary easing.

On the political front, the Trump administration finally gave the green light to let Biden begin his preparation for his administration. At the same time, Biden unveiled some of his picks for his upcoming administration with former Fed chair Janet Yellen as the most prominent name as treasury secretary. Yellen is seen as supportive for a more lax fiscal policy stance, prompting a positive reaction in markets and a steeper yield curve. In order to have a large fiscal easing in the US, the Democrats will probably have to win the run-off Senate election in Georgia on 5 January, which will give them a majority in the US Senate.

Mixed news this week suggests that a Brexit deal breakthrough is still not imminent. While this week was important, a deal may not be finalised until next week. Our base case remains a deal but we will be more concerned if there is no deal next week either. The EU summit on 10-11 December seems like the last meeting where EU leaders can approve a deal, so both the EU and the UK have only very limited time to make up their minds.

The combination of positive vaccine news, favourable US economic data and more political certainty in the US propelled risk markets higher this week. Equity markets hit a record high. Oil prices also rallied with the price on Brent crude rising above US48/bbl – the highest level since early March. Oil prices have found support from growing demand optimism on the back of positive vaccine news in addition to support from a gradual decline in broad USD.

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