Market Commentary 7th December 2020 from Charlie Hancock

For most of the week, headlines regarding UK-EU negotiations were encouraging, with hopes that intensified talks would result in progress on key issues such as fishing rights and rules regarding state aid for companies. The positive sentiment waned slightly on Thursday, after France said that they could veto a UK-EU trade deal which does not suit French interests.

Investors also appeared encouraged by UK regulators approving the Pfizer-BioNTech Covid-19 vaccine for emergency use. The UK government said it would begin roll out of the vaccine in the coming days.

Sentiment in Europe appeared to be hit by disagreements regarding the €750 billion pandemic recovery fund. Poland and Hungary have attempted to push back against the EU’s budget plans, resulting in the European Commission stating that they are consulting with lawyers to find a way of proceeding despite the objections. The €750 billion package has been viewed as a significant factor the Eurozone’s economic recovery and developments at this month’s EU leaders’ summit are therefore likely to be closed watched.

Germany confirmed on Wednesday that current lockdown restrictions would be extended until the 10^th January. With infection numbers climbing across the week, Italy announced that travel across regional borders within the country will be banned during the Christmas period.

Whilst US regulators are yet to approve a Covid-19 vaccine, sentiment in the US was lifted by news of the UK approving the Pfizer-BioNTech vaccine. Optimism around the vaccine was impacted by Pfizer stating on Thursday that they have experienced some supply chain problems.

Investors also appeared to be encouraged by a group of senators from both the Republican and Democratic parties proposing a $908 billion fiscal stimulus package. President-elect Joe Biden urged congress to pass the bill, stating that further economic relief is needed until the pandemic is over.

US economic data released last week was mixed. Payroll data showing that the US economy added 245,000 new jobs during November was significantly below economist expectations, whilst Purchasing Managers’ Index (PMI) surveys indicated improving sentiment in both the services and manufacturing sectors.

November’s PMI data for China was stronger than expected, with the official manufacturing index rising for the 9 month in a row. Sentiment on China was hampered by political tensions last week, after the US congress approved a legislative bill which could force Chinese companies listed on US stock exchanges to delist if they fail to adhere with US accounting rules. If the new laws are implemented, Chinese companies would have to comply within three years.

A senior member of the Bank of Japan (BOJ) policy committee, Hitoshi Suzuki, suggested that the bank will continue its programme of equity purchases during a speech last Thursday. Despite the BOJ now being the biggest holder of Japanese stocks, Suzuki stated that monetary easing, including the purchase of Exchange Traded Funds (ETFs), is expected to be prolonged further due to the impact of the Covid-19 pandemic.

Gilt yields were lifted by news of the UK regulator approving the Pfizer-BioNTech vaccine, together with positive comments from UK and EU negotiators.

The rise in European bond yields was seemingly hindered by expectations for further monetary stimulus from the European Central Bank (ECB) which would be aimed at keeping borrowing costs low. Data released last week showed that Eurozone inflation during November was negative for the fourth month in a row, which is likely to put pressure on ECB policymakers ahead of their December meeting.

GBP / EUR – Current 1.1064 Previous 1.1127

The Pound gained 0.98% against the US Dollar last week, but slipped by 0.57% against the Euro. Movements in Sterling last week were largely driven by news regarding post Brexit trade deal negotiations between the UK and the EU.