Please below the latest ‘Markets in a Minute’ update from Brewin Dolphin – received yesterday evening 15/12/2020
The rally in global equities took a pause last week in the absence of a new US stimulus deal and worsening rates of Covid-19 infections, which are requiring more lockdowns. In the UK, Brexit has weighed on the pound which helped the FTSE100 outperform in relative terms, although it still lost ground. The more domestically focused FTSE250, however fell more sharply, as hopes of a Brexit trade deal appeared to fade at the end of last week.
Last week’s markets performance*
- FTSE100: -0.05%
- S&P500: -0.96%
- Dow: -0.56%
- Nasdaq: -0.69%
- Dax: -1.38%
- Hang Seng: -1.22%
- Shanghai Composite: -2.82%
- Nikkei: -0.36%
*Data for week to close of business on Friday 11 December.
A mixed bag to start the week
Monday saw a mixed performance on equity markets. Most Asian markets rose as investors focused on the vaccine rollout and strong economic data out of China.
However, after a strong start, UK and US markets finished mostly lower as London and New York faced more stringent coronavirus lockdowns amid a continuing surge in case numbers. Severe lockdowns were also announced in Germany, the Netherlands and the Czech Republic, highlighting the near-term threats to economic activity. The FTSE100 closed down by 0.23% at 6,531.83.
In the US, only the Nasdaq finished in positive territory on Monday, rising 0.50% to 12,440.04. And despite signs of a possible breakthrough on stimulus negotiations, the Dow fell by 0.62% to 29,861.55, and the S&P500 dropped 0.44% to 3,647.49.
In Europe there was a more positive mood among investors as the UK and EU agreed to keep trying to hammer out a Brexit trade deal past Sunday’s deadline. The growing optimism that a deal could be done saw markets rise across the continent.
The Euro STOXX 600 gained 0.44% to 391.85, while the German Dax closed up by 0.83% and the Spanish Ibex 35 gained 0.96% to 8,140.80. In the UK, the more domestically focused FTSE250 index closed up by 0.72% on the news.
US stimulus and Brexit hopes increase chance of a Santa rally
There is a chance of a ‘Santa rally’ in the run up to Christmas but bad news headlines are a risk. Additionally, very strong equity performance like we saw in November can prompt some rebalancing at the end of each quarter which may see a reversal from equities back into bonds.
But, generally speaking, December is a time when the wind is in the market’s sails and it’s January that has seen the sell offs.
Supportive of this view, there was positive news overnight on Monday regarding a new US stimulus proposal totalling $748bn. Although smaller than the Democrats would have liked, it looks to have much broader support in Congress. There now appears a genuine appetite to get a deal done before the end of the year, which could avoid a cliff-edge for millions of Americans who were due to see their unemployment benefits cut. That could now be avoided, which would be a boon to markets. The risk, however, is that worsening virus news and widespread lockdowns could sour the mood.
UK and EU investors move back to bonds
That is certainly what we saw signs of at the end of last week as equities suffered a modest setback. None of the reasons should have been a surprise; we have known the Brexit transition period was ending this month; we have known that US Covid-19 infections would likely require more lockdowns; and we could see the labour market would soften if that happened.
So far, markets have been pretty resilient in the face of these risks, which is rational given that they are likely to pass within a matter of months, if not weeks. But it is notable how strong sovereign bond markets have been over the past week, moving back towards their all-time lows in terms of yield. It’s also notable that it is European yields (including the UK) that remain tight. This indicates that investors are becoming more risk averse, and the reason is Brexit.
Source: Thomson Reuters Eikon, Brewin Dolphin
Progress on level playing field and effect on the pound
On Monday there was a more upbeat tone, especially from the EU, as they suggested that negotiations were now focusing on the ‘architecture’ of a deal that would solve the sticking points on competition.
Brussels had wanted the right to impose unilateral tariffs on Britain if the UK failed to match EU rules as they evolved, since this could distort competition.
The EU has now dropped this demand and instead talks are continuing on the mechanism by which tariffs could be applied, possibly by binding arbitration.
President of the European Commission Ursula Von der Leyen and chief negotiator Michel Barnier both seem to believe a deal is possible. Barnier told EU ambassadors that fishing was now the last big obstacle to a deal.
The UK is downplaying any suggestion that it is backing down on the issue of fishing rights and quotas, although it is hard to tell how much of this is for show, and how much is genuine intransigence. Many observers will be hoping it is the former.
But even in the case of a ‘no deal’ outcome in the coming days, it is likely that there could be some form of ‘gentlemen’s agreement’ to prevent large-scale delays at the borders and buy both sides more time to negotiate a trade deal early next year. Indeed, the EU last week published proposed contingency measures in the event of no deal. If the UK agreed, it would involve essentially keeping current regulations in place for air travel and trucking, which would help avoid a lot of the chaos.
This helped the pound rise significantly on Monday, which suggests that the market is pricing in quite a bit of optimism about a positive outcome. This in turn means that, if there is a deal, the pound may rise modestly. But it also suggests that it is not pricing in a no-deal scenario, which could mean a substantial fall in Sterling if a deal cannot be reached.
This week’s ‘Markets in a Minute’ from Brewin Dolphin reflects on the US stimulus and Brexit news which has increased the chances of a ‘Santa rally’ in the run up to Christmas but worsening virus news and further lockdowns could put this at risk.
Please continue to check back for our regular blog posts and updates.
Charlotte Ennis
16/12/2020