Market Commentary 15th December 2020 from Charlie Hancock

Headlines regarding negotiations for a trade deal between the UK and the European Union (EU) were relatively pessimistic last week. Prime Minister Boris Johnson warned the public on Thursday that the UK should prepare for a no deal scenario, which he stated was a “strong possibility”.

Concerns around the economic impact of a no deal Brexit weighed on stocks which are highly exposed to the domestic economy. Lloyds Banking Group PLC saw their share price decline by 12.71% across the week, whilst housebuilder Persimmon PLC saw a 14.12% fall.

The EU signed off their budget plan for the next 7 years, after Hungary and Poland dropped their objections regarding the €750 billion coronavirus recovery fund. The European Central Bank (ECB) expanded their monetary stimulus measures, increasing the current quantitative easing (QE) programme by €500 billion, with asset purchases scheduled to run until March 2022.

The ECB also extended their scheme which provides low cost loans to commercial banks by 12 months. The expansionary measures were viewed as a necessary step to help the Eurozone’s economic recovery, given that it will take some time for the impact of the €750 billion recovery fund to be felt.

Hospitalisations for COVID-19 rose to new highs in the US last week, with daily deaths exceeding 3,000 for the first time. California, the most populous status, announced measures which require counties to implement stay at home orders when intensive care unit capacity is below 15%. Under the stay at home order, most non-essential businesses are forced to close, with retailers allowed to continue operating at 20% capacity.

On the positive side, US authorities approved the Pfizer-BioNTech vaccine for emergency use. Negotiations for a new fiscal stimulus bill continued, with senior Republican and Democratic lawmakers outlining their proposals for a $908 billion package. Data showing that weekly jobless claims rose to their highest level in 3 months highlighted the growing need for further fiscal support.

Despite little news flow on the subject, the threat of US regulatory action appeared to continue impacting sentiment for Chinese equities. Internet retailing giant, JD.com, saw their share price decline by 6.01% across the week, despite a successful initial public offering for their subsidiary company, JD Health, which rallied 55% on the first day of trading.

The recent speculation regarding a Japanese fiscal stimulus package was confirmed last week, with Prime Minister Suga stating that preparations for a $700 billion package are underway. The stimulus plan includes investment into green energy and digital innovation, but also focuses on the near term requirements to slow the spread of the coronavirus. Tokyo raised its virus alert level and implemented a 10pm curfew for bars and restaurants.

Government bond yields across the globe declined as investors sold riskier assets, such as equities, whilst pessimism regarding the UK-EU trade deal negotiations also contributed to gilt yields falling.

Government bond yields across the Eurozone declined, with the cautious mood amongst investors and further monetary stimulus from the ECB putting downward pressure on yields.

A rise in job losses and ongoing unemployment support claims, together with uncertainty regarding a new fiscal stimulus package weighed on investor sentiment last week. As a result, demand for US treasuries increased.

GBP / EUR – Current 1.0911 Previous 1.1064

The Pound declined against most major currencies, with worries of a no deal scenario with the EU prompting currency traders to turn bearish on Sterling. Across the week, the Pound fell by 1.61% against the US Dollar and 1.38% against the Euro.