Please see the below investment bulletin from Brooks Macdonald:
What has happened
Despite building optimism for 2021, markets still have periods where the near-term COVID realities are enough to derail the rally. Yesterday was such a day as COVID cases rose in the US and economic data, specifically US jobs data, deteriorated for the second week running. Today the US market is closed for Thanksgiving so liquidity will be lower and many in the US take tomorrow as a holiday so trade volumes will be quieter coming into the weekend.
The rate setting body of the Federal Reserve issued the minutes for their meeting on the 4/5th November yesterday. Interestingly the committee described current financial asset valuations as ‘moderate’ relative to interest rates implying the central bank could continue to add accommodation without distorting asset values. The main point was that the current level of asset purchases was appropriate but that the bank left open the possibility of additional stimulus if the economic situations deteriorated. Equally, the Fed discussed updating their forward guidance ‘fairly soon’ with rates expected at their lower band for the foreseeable future. There are many question marks over the extent to which fiscal policy will continue during 2021, however central banks are expected to continue to be highly accommodative given elevated unemployment rates and forward-looking inflation that remains below target.
UK: Spending and Brexit
The UK issued the latest OBR forecasts alongside the spending review with the OBR forecasting a 20/21 budget deficit of 19% and debt-to-GDP to rise to 105.2%.The theme of yesterday was fiscal ‘consolidation’ rather than ‘tightening’ which is to be expected given the UK is likely to be in an era of rolling lockdown restrictions until the spring. The move away from the fairly unfettered fiscal spending earlier this year is perhaps a little early given high unemployment rates, but the UK Government has made it clear it views these elevated debt-to-GDP levels as a long term risk. Meanwhile Brexit talks ebb and flow with yesterday sounding less positive as EC President von der Leyen said ‘I cannot tell you today, if in the end there will be a deal.’
What does Brooks Macdonald think
Both the UK and EU are arguing that the other side is dragging its feet over Brexit talks with the EU yesterday blaming the UK for adopting an uncompromising position. With just over a month to go, business confidence is wavering with corporates struggling to work out what the trading environment will look like in January, not only due to COVID restrictions but also Brexit.
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