Market Commentary 21st December 2020 from Charlie Hancock

Negotiations between the UK and the European Union (EU) appeared to stall at points during the week, with fishing rights appearing to be the main hurdle. Despite this, encouraging comments from officials on both sides helped push Sterling to its highest level against the US Dollar since May 2018.

Companies which are sensitive to the domestic economy saw strong gains across the week, with Barclays rising by 6.57% and housebuilder Persimmon seeing a 9.78% gain. The rise in Sterling contributed to declines for companies who generate most of their revenue overseas, with GlaxoSmithKline falling by 4.02% and British American Tobacco declining by 4.53%.

Better than expected Eurozone Purchasing Managers’ Index (PMI) readings contributed to investor optimism in Europe last week. December’s manufacturing PMI for Germany was expected to show a decline from the previous month, but recorded a rise from 57.8 to 58.6, indicating that economic conditions in Germany are improving faster than anticipated.

The European Central Bank (ECB) lifted a ban on dividends for Eurozone banks last week, although restrictions on the amount of dividend payments and share buybacks remain. The ECB also told banks to be prudent with staff bonus payments.

Investors appeared to be encouraged by the US roll out of the Pfizer-BioNTech vaccine commencing. In addition, US authorities approved a similar vaccine developed by Moderna, which means significantly more vaccine doses will be made available to US healthcare providers in the coming weeks.

Negotiations around a fiscal stimulus bill continued in congress throughout the week, with lawmakers eventually approving a bill on Sunday. The new package amounts to around $900 billion and includes direct payments to individuals of $600 each, as well as funding for small businesses.

Japan continued to see a rise in coronavirus infections, with a record high of 3,200 new daily cases being reported. The medical alert level in Tokyo was raised and Prime Minister Suga suspended a domestic tourism programme which provides subsidies for New Year holiday celebrations.

Sentiment for Chinese equities was supported by economic data last week, with industrial output, retail sales and fixed asset investment in November all seeing rises from 2019 levels. Optimism was however tempered by US authorities imposing a ban on exports to the partially state owned Semiconductor Manufacturing International Corporation (SMIC), based in Beijing.

Whilst optimism on a UK-EU trade agreement helped to lift yields, the rise was dampened by the Bank of England voting to keep interest rates on hold and maintain the level of bond purchases via its Quantitative Easing (QE) programme.

UK inflation during November was weak, with the Consumer Prices Index (CPI) measurement of inflation falling to 0.3% from 0.7% during October. The slowdown in inflation reflected reduced activity during November’s national lockdown.

Expectations for a fiscal stimulus deal being agreed imminently helped Treasury yields to climb throughout the week, with investors selling ‘safe haven’ assets such as treasuries.

GBP / EUR – Current 1.1011 Previous 1.0911

The Pound rose by 2.26% against the US Dollar and 0.92% against the Euro, with the Eurozone currency also displaying strength last week.

Optimism around a UK-EU trade agreement was the main driver behind Sterling’s rise last week. US investment bank, JP Morgan, said on Friday that the odds of deal being reached had risen to 70% across the week.

Data for US inventory levels came in below expectations, indicating that demand for oil is rising faster than anticipated.