Blonde Money: Britain After Brexit

It only took four-and-a-half years, three prime ministers and two general elections. There is finally a Brexit Agreement. There is no doubt relief in many quarters that some form of agreement has been reached and for many months there is bound to be relief in financial markets also. However, this is a living document. It will take decades to work out what it all means for the British economy. Even then, it will change over time. Unless of course one or both sides decide to end it, which they can do, within the terms of the agreement, with 12 months’ notice. Parts of it can also be terminated, without the whole agreement being cancelled. That means more time, more prime ministers, and more elections, before the dust settles on what this all means.

But what do we know right now?

Inevitably the focus is falling on what it means for me and how I live and work.

  • Can I take my pet to visit granny in Northern Ireland?
    • Yes, but only with a new pet passport.
  • Can I live half the year in my second home in Provence?
    • No, only 90 days out of each 180.
  • Can I be a lawyer in Czechia?
    • Yes, but only if you’re resident.
  • What about being a lawyer in Austria?
    • Yes, but only if you’re not a resident.
  • Can I be a tobacconist in France?
    • No.

…and so on. These personal questions are consuming people’s energy and generating frustration. (For further details on these nuances, please consult this excellent primer from the Institute for Government).

They are just one of the inevitable frictions as the UK separates from the EU.

The other is supply chains. Despite the shrieking headlines over blocked up British ports, the truth is that supply chains were already under siege from the pandemic. We have effectively already seen a global No Deal Brexit, with borders slammed shut between nations for months. Companies have had to seek alternatives to build resilience and that process will continue.

There may be zero tariffs, but trade also requires documentation and paperwork. These “non-tariff barriers” always exist between nations. They need not prevent trade altogether. The EU still trades with the US, and vice versa, despite the lack of a free trade agreement between them.

Whether the Brexit-specific friction increases will depend on how much the UK wants to diverge. The more divergence, the more short-term pain for potential long-term gain. And the decision for that lies with the UK Prime Minister.

The success of all of this is not economic. It is political. It will depend on the leaders who take us forward for the years ahead.

And the Trade and Cooperation Agreement (TCA) takes account of this with its outline of arbitration methods if trade disputes should escalate. This is common with any trade agreement; the WTO uses their Dispute Settlement Body to sort out violations. But it’s not just a boring legal mechanism. It’s a potential political tool.

Let’s look at fish.

  • Yes, the starting point is a 25% increase in the value of the catch for the UK, phased in over 5.5 years, at which point annual negotiations kick in
  • But just look at the dispute resolution mechanism that kicks in if either side breaches these obligations
    • Preferential tariffs on fish and access to waters could be removed
    • AND so could tariffs on other goods
    • AND this would continue until an arbitration panel determines if it were a proportionate response
  • If either side terminates the Fisheries agreement, then that automatically cancels the trade, aviation and road transport sections of the deal

You can see where an aggressive leader might take this.

If you slap tariffs on my fish, then I slap them on yours. Then I slap them on other goods. Then you threaten to rip up the Fisheries Deal. Then both of us lose road and air access. Then the domestic law courts on each side get bogged down arguing the case… and we end up in a stand-off until one side concedes.

These arguments have already begun. The UK wants to diverge in certain areas, that was the point of leaving. Take the latest suggestion that the UK will loosen regulations on the 48-hour working week. The EU can complain if it’s seen to impact competition. But then the courts come in and everyone is bogged down until someone can decide what a proportionate retaliation might be.

This will not only rumble on but be deeply divisive at times. It has the potential to hurt economic growth in the short-term but increase it in the long-term. Europe’s economy has long faced structural challenges from an ageing workforce and sclerotic bureaucracy. Now the UK has escaped, it can forge a new path. Whether it is successful will depend on the politicians in charge.

Brexit shrugged: FTSE, sterling jump as 2021 starts in risk-on mode

Morning Note
  • FTSE and sterling rally in first genuine post-Brexit trading day
  • Entain shares surge on MGM offer
  • Markets eye big week with Georgia Senate runoffs

Global stock markets enter 2021 at or near all-time highs despite ongoing uncertainty around the pace of recovery from the pandemic and the threat of fresh lockdowns lasting well into the spring. Despite the anxiety around when we get back to normal, the major fears of last year have receded and liquidity remains strong. Asian markets ex-Japan rose to new all-time highs, with Tokyo finishing the day off 0.7% due to concerns about tougher coronavirus restrictions in the capital and surrounding areas. European stocks got the new year trading session off to a solid start, with the DAX up 0.5% and Stoxx 50 rising 0.25%.

The FTSE 100 had ended 2020 on a bit of a sour note, but is much firmer this morning with the index +2% and well bid above the 6,500 mark and bulls eyeing the recent highs close to 6,700. There is a general risk-on mood and vaccine positivity could be a factor – the UK approved the use of the Oxford University/Astra Zeneca vaccine, with half a million doses ready today. It will allow a faster easing of restrictions, but the country looks likely to endure tougher restrictions in the meantime. We could also say that the lack of chaos/Armageddon/doomsday from Brexit is also a factor. Indeed after a fairly muted response in the FX markets to news of the deal on Christmas Eve, following the UK’s leaving the EU properly on Hogmanay, sterling has headed higher. GBPUSD advanced to its highest in almost three years above 1.37 amid broad dollar softness. We could not see sterling slowly grind its way to 1.40 as long as the economy can recover from the pandemic quickly enough to stop the BoE doing any further damage by taking rates negative.

Entain shares popped on news MGM Resorts International made a bid for the company. The offer of 1,383p per Entain share represents a premium of 22% based on the Dec 31st closing price, but the board say the proposal ‘significantly undervalues the company and its prospects’. The market thinks MGM (or another) will be good for more – shares rose 27% at 1,440p. We knew the opening up of the US gaming market would be good news for UK firms with interests there and so it is proving. And it should be said the yanks would certainly prefer the Brits to stay off their turf. We should also note that good global businesses trading with a UK-listed discount to the share price remain attractive to foreign groups hungry for growth. Clarity around Brexit at long last may see more bids of this nature emerge.

Talking of UK discounts, Ferguson is heading in the other direction and selling its Wolseley UK division for £308m to private equity group Clayton, Dublier & Rice. CEO Kevin Murphy says the move ‘further simplifies the group and allows us to focus entirely on investing in and developing our business across North America where we have the greatest opportunities for profitable growth’. True, and could it also now allow it to make the move to America it so desperately wants?

US stocks wrapped up 2020 on a high, with the Dow Jones and S&P 500 up 0.65% to new all-time peaks last Thursday. Futures are pointing to a firmer open today around the 30,700 and 3,770 areas respectively. The New York Stock Exchange will delist three Chinese telecos because of links to China’s military. China Telecom, China Mobile and China Unicom Hong Kong will be delisted in New York this month, but they all retain listings in Hong Kong.

Tesla reported strong Q4 delivery numbers, taking the annual print to half a million as it benefitted from the initiation of Model Y production in China. The company delivered 180,570 vehicles in the fourth quarter, beating expectations for around 174k. New US and German plants set to open this year will enable it to significantly raise production in 2021 and beyond.

Data this week includes the Fed’s meeting minutes, PMIs and a nonfarm payrolls report on Friday. Labor Department figures last Thursday showed initial jobless claims declined by 19,000 to 787,000 in the week ended Dec 26th, which was better than expected. Continuing claims fell 103k to 5.2m, whilst the number of people receiving benefits across all programmes fell by 800k to 19.6m.

Tomorrow’s Georgia runoff elections for the two Senate seats will be crucial – if the Democrats take both they would end the GOP majority and with a 50/50 split the deciding vote would sit with VP Harris. This is high stakes stuff – if the GOP can hold one they can block the Biden agenda. But if they fail it opens up the likelihood of some of the more progressive tax and spend policies becoming reality.

Oil prices rose ahead of the OPEC+ meeting, the first of new monthly ministerial discussions between the cartel’s members and allies led by Russia on how to proceed with production curbs initiated last year. In December, OPEC+ agreed to limit a tapering of output cuts to just 500k bpd in January and decided on monthly meetings to decide on output for the following month. Prices for Brent have stabilised around the $50 level following the vaccine news in November last year, whilst market intervention by OPEC and allies is clearly having some influence. Bulls will be looking for OPEC and co to signal they are not in a rush to raise production in February, which could be premature.

Gold appears to have made a decisive move higher with a breach of the top of the channel and its 50-day simple moving average with a bullish crossover by the 21-day line showing good upside momentum. Resistance seen at the 23.6% Fib level at $1,929. Declining US real rates (10yr TIPS back to -1.06%) and a weaker dollar are conspiring to create the conditions for another bump higher for gold.

Gold appears to have made a decisive move higher this morning.

Rotation trade unwinds on new Covid fears, Sterling gaps lower on lack of Brexit progress

Morning Note
  • Pound gaps lower on lack of Brexit deal, border closures
  • US Congress set to pass $900bn stimulus package
  • Rotation trade reverses on new Covid fears

No Brexit deal, a new strain of the coronavirus, stricter lockdowns and the closure of key trade routes to the EU: Merry Christmas everyone. First up sterling and it’s been a very rough start to the Christmas week for the pound, as the lack of a Brexit deal and the closure of key freight routes to Europe knocked sentiment. Brexit talks continue today but key sticking points remain, whilst several European countries have blocked travel from the UK due to a mutant strain of the coronavirus rife in the southeast of England. GBPUSD gapped down from the 1.35 close on Friday to trade under 1.33 again but near-term support emerged at 1.32650. The pound remains on the hook for a severe downside shock if there is no deal by Christmas.

Worries about Brexit and the emergence of a more transmissible new strain which has led to tighter lockdowns unnerved investors as the start of the European session saw heavy selling in cyclical names and a broad 1-2% decline for the main bourses. British banks and others with the most exposure to the UK fell the most on the lack of a Brexit deal and the uncertainty over the UK economy, whilst travel stocks were whacked by the new restrictions on movement. A tougher lockdown in the southeast is also a nightmare for retailers, though those listed entities with a decent online platform will do much better than the family-run shops forced to close. The rotation trade unwound – Ocado and Fresnillo jumped while the likes of Lloyds and IAG fell sharply. Shell shares fell over 3% as it announced it would write down $3.5bn-$4.5bn in oil and gas assets next year, dragging BP lower by 5%.

This is the kind of near-term volatility we can expect until the full force of vaccines is felt. There has been a lot of hope already priced in with the vaccine-inspired November rally so we cannot expect a straight line higher for stocks. Unfortunately, tougher Tier 4 restrictions may be in place until the spring, so corrections of this nature are to be expected. The cavalry may be coming but the homesteaders need to batten down the hatches and face another onslaught before they arrive.

The risk-off tone emerged despite US Congressional leaders achieving a breakthrough on a Covid relief package. The $900bn, which lawmakers think has enough support to pass today, includes $600 stimulus cheques for every individual and enhanced unemployment benefits. US futures traded lower despite the news. Meanwhile, the FDA approved the use of Moderna’s vaccine in the US. Watch for US banks after the Fed said they could resume share buybacks.

Big falls for reopening stocks in the early part of the session.

Big falls for reopening stocks in the early part of the session.

Stocks shrug as Brexit, US stimulus deals remain elusive

Morning Note
  • European stock markets higher after Wall Street sets new record high
  • German business confidence, UK consumer sentiment recovering
  • Brexit and US stimulus deals remain elusive

The two big pre-Christmas deals remain elusive. Brexit talks have hit a roadblock with only a handful of days until the deadline. The European Parliament set a Sunday deadline to see the text in order to ratify it in time. Meanwhile, Congressional leaders say they will work into the weekend to hammer out a Covid relief deal for the US. Rising optimism on both fronts has had to be tempered by the fact there is still nothing on paper.

On the Brexit front, Boris Johnson told European Commission president Ursula von der Leyen that a deal is “drifting away from us” but one could be done if the EU gives ground of fisheries and state aid. Sterling made fresh two-and-a-half year highs against the broadly weaker USD yesterday but has lost steam and pulled back a touch since. The spot market still believes a deal is coming although odds on a no-deal have shortened in the last 24 hours.

Meanwhile, it’s a similar story across the pond as the fiscal stimulus package remains slippery. Senate Majority leader Mitch McConnell said he is no stranger “to December funding deadlines or the occasional pre-Christmas cliff-hanger”. Sentiment remains positive though. US markets set fresh record highs again and European markets turned higher again this morning. The German Ifo business climate exceeded expectations at 92.1, while the expectations index also improved to 92.8 vs 92.5 expected. The Ifo noted that the confidence goes beyond manufacturers with even services and wholesalers doing well.

UK consumer sentiment rebounded the most in 8 years according to a survey this morning, indicating how vaccines are already acting to support confidence in getting things back to normal. The GfK consumer confidence rose to –26 from –33 in November. Yet retail sales fell in November as the effects of lockdowns on the economy were felt. Retail sales volumes decreased by 3.8% when compared with October as many shops were forced to close. Despite the monthly fall, overall sales remain above their pre-pandemic levels, the ONS said.

Data was soft yesterday: US unemployment claims exceeded expectations again. Initial claims rose to 885,00 for the week ended Dec 12th, up from 862k in the previous week and ahead of the roughly 800k expected by economists. Claims remain above the level seen in 2008/09 but are down from the >6m or so we saw at the peak of the pandemic. Meanwhile, the Bank of England left rates on hold and delivered no surprises for the market. The MPC voted unanimously to keep the main lending rate at 0.1% and the stock of asset purchases at £895 billion. There was not a lot in this meeting for the market, though there was a clear signal the Bank would ease policy in the event of a no-deal Brexit.

Chart: GBPUSD off its highs struck yesterday but remains well supported as long as a deal is still possible. Asymmetric downside risks in event of no-deal.

GBPUSD off its highs struck yesterday but remains well supported as long as a Brexit deal is still possible.

Chart: EURUSD tests top of the channel, path to 1.25 remains open.

EURUSD tests top of the channel, path to 1.25 remains open.

Risk on, dollar lower

Morning Note
  • Risk sentiment buoyed by Fed, stimulus hopes
  • Dollar sinks to fresh lows
  • Priti Patel says UK and EU in ‘tunnel’ negotiations

Solid start: market sentiment appears buoyed by hopes US lawmakers can strike a stimulus deal and Brexit talks are close to a breakthrough, albeit they are still hanging by a thread and the deadline is only two weeks away. European equities traded higher on Thursday, while US futures rallied and looked to open at record highs after the Fed signalled it will stand by the economy and keep the cash taps on.

The Fed will continue to buy $120bn of bonds until “substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. This could be taken as a fairly hawkish statement, signalling the Fed’s readiness to slow the pace of asset purchases as soon as perhaps the middle of next year, by which time policymakers think people will be comfortable heading out. Moreover, the Fed did not expand asset purchases as some had called for, nor did it shift the focus of asset purchases to longer dated debt. However, Fed chair Jay Powell insisted that the Fed would do more if needed and suggested any inflation next year would be transitory. On the whole, this remains a very dovish bias, but policymakers upgraded their near-term economic forecasts. Markets were not unduly responsive to the statement, with the 10-year Treasury holding within the 0.925%-0.95% zone.

US lawmakers are moving close to agreeing a $900bn Covid relief bill that could include $600 stimulus cheques and extended unemployment benefits. Both sides are sounding a lot more optimistic, but there is still some haggling over the finer details to be done before it is signed off.

Home secretary Priti Patel said the UK and EU were in tunnel negotiations. It’s not quite the breakthrough moment we’ve been waiting for since they’ve been some form of last-ditch closed-door talks for weeks. The pound traded higher.

Sterling advanced to make new highs vs the dollar amid swirling reports of progress and deadlock on the Brexit front, however the move seems to be more linked to dollar weakness than a new bout of pound strength. The dollar index broke down to its lowest since Apr 2018 under 90. This helped GBPUSD move clear of its recent highs at 1.3540 to 1.35850 this morning.

The Bank of England meets later and should signal it’s prepared to do more should financial conditions deteriorate in the New Year. The MPC voted through an additional £150bn in QE in November is not in a rush to pull any more strings just yet, particularly given the Brexit uncertainty. Any talk of negative rates will be jumped on by the market, but this should be a fairly quiet affair.

Crude oil prices rose after a big draw on US inventories lifted sentiment and reduced fears of a build-up of stocks ahead of the Christmas period. The draw of 3.15m barrels compared with a huge 15m build in the previous week. Gasoline inventories rose by 1m barrels, but this was less than expected. WTI (Jan) kicked on after the release and moved above $48 where it has held gains.

Brexit talks go to extra-time, AstraZeneca drops on takeover

Morning Note
  • Sterling rises as Brexit talks are extended again
  • European markets opened higher and US futures up
  • US stimulus in focus, Fed meeting later this week

Brexit talks are going into extra-time; neither side want it to go to penalties. Both the UK and EU say they will continue talking and want to go the ‘extra mile’. The market read this as progress towards a deal, although the two sides remain far apart on the last big issues. Sterling gapped higher at the Sunday night open, with some shorts maybe covering their positions on the extension. GBPUSD advanced to 1.34, bouncing on hopes of a deal, while the 200-day simple moving average offered the near term support. The pound also strengthened versus the euro as EURGBP dipped from the 0.92 area traded on Friday back towards 0.90. Those gaps may offer some decent intraday support but unless hopes rise in the next day or two would be liable for a fill. Sterling still trades with headline risk, but the truth is the ranges remain very tight and the failure to break out in either direction reflects the fact that the outcome remains very binary and both deal and no-deal are still very much in play. It’s probably a toss of the coin now whether we get a deal or not.

British banks with high exposure to the UK economy and property market remain high beta Brexit stocks – Lloyds and Natwest both rose 5% in early trade having taken a bit of a thumping at the end of last week. Likewise, housebuilders popped 5% higher on Brexit deal hopes. These stocks are a leveraged bet on the UK economy, which in the near-term at least is going to be at the mercy of a Brexit trade deal and the vaccination programme. Markets have also pushed back expectations for interest rate cuts by the Bank of England, which meets later this week.

AstraZeneca shares dropped 6% – seemingly on fears it’s paying too much for the US biotech company Alexion. Whilst the 45% premium may seem high, it’s probably not that significant when you consider the sector and the cash flow generation and revenue growth that it will bring. Debt taken on to buy the company will be repaid quickly. Richly-valued AZN shares needed to do some work too. It’s a big turnaround from the dark days of six years ago when Pfizer tried to land AstraZeneca.

Elsewhere it’s a familiar story of hope around fiscal stimulus in the US and vaccines being rolled out, with the Pfizer/BioNTech jab being rolled stateside today as part of a programme that will see 100m people inoculated by the end of March. Vaccines will continue to support risk sentiment and provide succour to the stock market as it enables investors to look past the current situation to a more normal 2021. For the time being Main Street needs help and as far as stimulus goes, getting a deal through Congress is proving as difficult as Brexit. The $908bn bipartisan package is being put forward today, but it’s uncertain whether it will pass.

The Federal Reserve meets later this week, with attention on its emergency $120bn monthly bond buying programme. It’s expected that the Fed will anchor expectations around the longevity of the asset purchases to make it clear it’s in this for the long haul. With 10-year Treasury yields rising in recent weeks, and coming close to 1% again, it may also choose to switch its focus to longer dated debt in order to better anchor interest rate expectations for a longer duration.

Week Ahead: BoE & FOMC meets plus US retail sales

Week Ahead

The week ahead holds meetings for the FOMC in the US and the Bank of England, setting the tone for financial policy to come as the pandemic continues. Europe also releases a new wave of flash PMIs, while we also forecast what could happen in the US retail sector post-Black Friday. 

FOMC meets 

For the final time in 2020, the US Federal Reserve’s Federal Open Market Committee (FOMC) meets to decide the direction of US monetary policy. 

The case for further Fed-sanctioned stimulus is being strengthened by disappointing Nonfarm Payrolls. About 245,000 new jobs were added to the US economy in November: great for non-pandemic times, but less than half of those predicted. 

Will the US economy start to struggle in December? It’s possible. 

Commentators have forecast two financial aspects the Fed could be considering in its next round of meetings: adjustments to its current asset buying programme, and a rejigging of its emergency lending programmes. 

First, assets. The Fed is currently hoovering up $80bn worth of Treasury securities and $40bn mortgage-backed securities every month. Yields at the short end of the Treasury curve remain well anchored near all-time lows. 

November’s meeting minutes suggest many FOMC members are more inclined to extend the maturity composition of its assets rather than increase the pace of purchases. 

With that in mind, it’s likely that the FOMC won’t announce any actual changes to its asset purchasing programme in December, but probably hint at alterations due in the coming months. 

Secondly, scaling back lending programmes may be on the agenda. Some $454 billion was approved for lending under the Trump White House’s CARES Act, but uptake was only around $6n. Essentially, the US government might want its money back. 

Bank of England meets too 

The BoE is gearing up for its final round of 2020 meetings too; meetings that could be coloured by the progress, or lack thereof, on a Brexit deal. 

Despite PM Johnson crashing into Brussels last week like Indiana Jones with a big whip in one hand and a skinny latte in the other to try and break the deadlock, “significant divergences” still remain between the UK and Europe. 

BoE governor Andrew Bailey has a lot on his plate as is, without the very tangible threat of a no-deal Brexit looming like an economic mushroom cloud. The Covid-19 pandemic continues, even with the UK starting the world’s first mass vaccination regime to combat the virus. 

What’s more, the UK’s GDP growth has taken a snail-like character after the cheetah-esque performance earlier in the year prior to lockdown 2.0, crawling up just 0.4% in the last quarter. 

The main hues being used to paint the UK’s economic portrait are slowing GDP growth, a no-deal Brexit and the continuing effects of the pandemic.  

All of this will no doubt play into the BoE’s talks and December outcomes.  

According to remarks he made to a Westminster committee in November 2020, Governor Bailey thinks of the those three, the biggest issue will be falling out of the EU with no deal. 

The long-term effects… I think would be larger than the long-term effects of Covid,” he said. 

“It is in the best interests of both sides…for there to be a trade agreement and for that trade agreement to have a strong element of goodwill around it in terms of how it is implemented.” 

US retail sales 

The latest batch of US retail sales data is released this coming week. 

Will they pick up? The previous couple of month’s performance has been less than stellar. October saw a 0.3% rise, hitting $553.33bn. September’s figures have been revised down by three tenths of a percentage to 1.6% growth – which is still strong, but perhaps not as strong as US retailers would hope. 

But there is a Black Friday-shaped ace up US retail’s extensive sleeves. American consumers spent $9bn online during the annual shopping frenzy, a y-o-y increase 21.6%. 

As ever in this crazy year, there is a twist in the tale. In-store footfall was down over half, according to Sensormatic Solutions, so while the see saw is tipped towards online shoppers, actual, physical shopping will likely be massively lower. 

Cyber Monday, though, was the single largest online shopping day on record in the US. Sales on the Black Friday follow up weighed in at $10.8bn, up 15% against 2019’s figures. 

Will this be enough to counter the slow growth and put US retail sales back on a positive footing? 

European PMIs 

It’s time for another round of flash European PMIs, and if the previous round is any indicator of current performance, we’re in for an expected second EU economic downturn. 

The return to lockdown has not been kind to Europe financially.  

As of November, Eurozone PMI had fallen from 50 to 45.1. Services continue to take the largest hit overall, according to ING, with Service PMI falling from 46.9 to 41.3 in November. Unemployment in the industry continues to rise and will likely do so until lockdowns are lifted. Let’s hope vaccines can start a European rollout soon. 

Still, manufacturing signals are stronger as a buoyant Germany helps keep things afloat. ING says the manufacturing PMI merely indicated a slowing of output growth, but not contraction.  

German export sales continued to the boost nation’s manufacturing growth in November in Germany, suggesting that the milder second wave outside of the eurozone is helping exporters to recover ground. 

Let’s wait and see what December’s flash PMIs bring. 

Brexit 

At the time of writing, we’re still yet to hear a decision on Brexit. A tete a tiny tete between Johnson and Ursula von der Leyen couldn’t shift the deadlock. As it stands, we’re still waiting for an end to this long, trying saga.  

Webinars to watch 

Trading pro Mark Leigh is once again holding a suite of educational trading-focussed webinars this week to help you get further insights into the nitty gritty of trading. Highlights include: 

Mark Leigh’s Trader Clinic 

Monday 14th December 2020 – 2.00pm GMT 

See how a professional uses the ups and downs of trading to hone their strategy and improve their returns with our Trader Clinic. Join Mark Leigh as he demonstrates the procedure he uses to evaluate his winning and losing trades and build a better strategy. 

Sign up 

Ten Trading Rules for Every Level of Trader 

Tuesday 15th December – 6.00pm GMT 

Trading is not an exact science, the markets are live and often unpredictable, that is why you need a set of rules as a basis for making educated and calculated trading decisions. 

Sign up 

Where is the Rand Going in 2021? 

Thursday 17th December  5.00pm GMT 

In light of Fitch’s recent downgrade of South Africa, there are increasingly question marks over whether the rand can hold current levels against the US dollar. Fitch’s downgrade reflected what is sees as high and rising government debt, exacerbated by the economic shock triggered by the COVID-19 pandemic. Does this mean a weaker currency next year? 

Sign up 

Major economic data 

Date  Time (GMT)  Currency  Event 
Mon Dec 14th  Ongoing  CNH  Foreign Direct Investment ytd/y 
       
  10.00am  EUR  Industrial Production m/m 
       
Tue Dec 15th  12.30am   AUD  Monetary Policy Meeting Minutes 
       
  2.00am  CNH  Retail Sales y/y 
       
  7.00am  GBP  Unemployment Rate 
       
  2.15pm  USD  Industrial Production m/m 
       
  10.00pm  AUD  Flash Manufacturing PMI 
       
  10.00pm  AUD  Flash Services PMI 
       
Wed Dec 16th  12.30am  JPY  Flash Manufacturing PMI 
       
  7.00am  GBP  CPI y/y 
       
  8.15am  EUR  French Flash Services PMI 
       
  8.15am  EUR  French Flash Manufacturing PMI 
       
  8.30am  EUR  German Flash Manufacturing PMI 
       
  8.30am  EUR  German Flash Services PMI 
       
  9.00am  EUR  Flash Manufacturing PMI 
       
  9.00am  EUR  Flash Services PMI 
       
  9.30am  GBP  Flash Manufacturing PMI 
       
  9.30am  GBP  Flash Services PMI 
       
  1.30pm  CAD  CPI m/m 
       
  1.30pm  USD  Core Retail Sales m/m 
       
  1.30pm  USD  Retail Sales m/m 
       
  2.45pm  USD  Flash Manufacturing PMI 
       
  2.45pm  USD  Flash Services PMI 
       
  3.30pm  USD  US Crude Oil Inventories 
       
  7.00pm  USD  FOMC Economic Projections 
       
  7.00pm  USD  FOMC Statement 
       
  7.30pm  USD  FOMC Press Conference 
       
Thu Dec 17th  12.30am  AUD  Employment Change 
       
  12.30am  AUD  Unemployment Change 
       
  9.00am  CHF  SNB Press Conference 
       
  12.00pm  GBP  MPC Official Bank Rate Votes 
       
  12.00pm  GBP  Monetary Policy Summary 
       
  12.00pm  GBP  Official Bank Rate 
       
  3.30pm  USD  US Natural Gas Inventories 
       
Fri Dec 18th  Tentative  JPY  Monetary Policy Statement 
       
  7.00am  GBP  Retail Sales m/m 
       
  1.30pm  CAD  Core Retail Sales m/m 
       
  1.30pm  CAD  Retail Sales m/m 

 

Key earnings data 

Date  Company  Event 
Tue Dec 15th  Nordson  Q4 2020 Earnings 
  Inditex  Q3 2020 Earnings 
     
Wed Dec 16th  Lennar  Q4 2020 Earnings 
     
Thu Dec 17th  Accenture  Q1 2021 Earnings 
  FedEx  Q2 2021 Earnings 
  Cintas  Q2 2021 Earnings 
  General Mills  Q2 2021 Earnings 
     
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IPO frenzy stateside, no-deal Brexit preparations ramp

Morning Note

Shares in Airbnb surged on debut, closing above $144 on their first day of trading after listing at $68. The more-than-doubling in the share price reflects huge investor interest, particularly in the retail space, as well as significant excess liquidity that is finding a home wherever it can. There is a strong fear of missing out on these mega IPOs, and investors seem very willing to discard usual valuation sensibilities to get on board. DoorDash only slipped by 1.8% on its second day of trading after soaring on its debut the day before. With a market cap of $68bn for Airbnb let’s just not talk about valuation and earnings multiples.

 

Preparedness for a no-deal Brexit is now the order of the day as both the EU and UK are talking impasse. Sunday’s deadline may be like all the rest (and be pointless) but there are only 3 weeks until January 1st so time really is running out. Sterling has been relatively unscathed so far but this morning GBPUSD broke down at the week lows at 1.32250 this morning to hit its weakest in almost a month. No deal risks are rising so the market is trying to price it – the problem is the binary nature of the outcome which leave the market only able to guess at fair value.

 

Yesterday, the European Central Bank (ECB) conformed to expectations by expanding its emergency asset purchase programme by an additional €500bn and extended the duration of the scheme to March 2022. Christine Lagarde suggested that the €1.85bn package would not be used fully used, which brought the ceiling vs target debate back into play. At the same time, EU leaders passed the €1.8tn budget after Hungary and Poland dropped their objections, paving the way for payments to be made next year. Meanwhile, US CPI inflation rose a little faster than expected in November and initial jobless claims were worse than expected, hitting 853k vs the 725k forecast. It points to weakness in the economy as cases have risen in recent weeks, eroding confidence in the recovery without a stimulus plan on hand to bridge the gap until vaccines are rolled out en masse.

 

European markets traded a little weaker early on Friday, with the major bourses down around 1% following on from a softer session on Wall Street that left the S&P 500 and Dow Jones lower but the Nasdaq rose a touch. No-deal Brexit fears are probably taking the shine off European equities, whilst there has been any significant catalyst from the US as lawmakers continue to discuss stimulus without getting a deal over the line. 

 

Chart: FTSE 100 lower, 6520 is the key support level 

FTSE 100 lower, 6520 is the key support level

No Brexit breakthrough, Ocado raises guidance, ECB set to ease again

Morning Note

• European stock markets rise despite a tough session on Wall Street led by a sharp decline in big tech
• Sterling lower as Brexit talks hit brick wall after Boris Johnson and Ursula von der Leyen failed to bridge the gap over dinner
• ECB set to expand and extend emergency asset purchases, US inflation also on tap

The darkest hour is just before the dawn: There was no across-the-table breakthrough on Brexit over dinner last night, after a dinner date between Boris Johnson and Ursula von der Leyen only served up disappointment with a side of ennui. The gaps remain – a Sunday deadline has been set but the chances of a deal being struck are clearly diminishing over time – the acceleration towards the deadline was supposed to create the necessary urgency to land a deal. Looking at the talks from the outside, it seems as though no-deal odds are shortening fast. But we should caution that this is to be expected – the nature of the brinkmanship being pursued by both sides means a deal always seems further away than it may be in reality and will seem furthest away just when it’s within striking distance.

GBPUSD moved lower overnight, dropping from yesterday’s peaks above 1.3470 to test support at 1.33. The lack of any significant moves betrays the fact traders think both outcomes – deal or no-deal – are still very much in the running. This week’s lows at 1.3225 are in sight if 1.330 cracks.

Sterling was also under the cosh as UK GDP figures showed growth slowed to 0.4% month-on-month in October. It was the sixth consecutive month of growth but the rate is slowing down. GDP in October was 23.4% higher than April but the economy remains 7.9% smaller than it was in February 2020, before the full impact of the coronavirus pandemic, and 8.2% smaller year-on-year. Lockdowns in November will not help the overall Q4 picture but markets are only looking ahead to a post-covid world these days, thanks to vaccines.

Wall Street suffered a bruising session, with the Dow and S&P 500 closing down despite striking record highs early in the session. The Nasdaq tumbled 2% as tech stocks took a beating on concerns about a regulatory push in the US. Facebook dropped 2% as the Federal Trade Commission and 48 states filed two antitrust lawsuits against the company centring on its acquisition of Instagram and Whatsapp and what is seen as anticompetitive conduct. New York attorney Letitia James, who is leading the coalition of states, said that ‘Facebook has used its dominance and monopoly power to crush smaller rivals and snuff out competition’. It’s a shot across the bows of big tech – Google, Facebook, Apple all fell a similar level. Regulatory overhang may be a drag on valuations.

But if there were doubts about the market’s appetite for new supply and investors’ willingness to pay a premium for growth, these were certainly dashed yesterday by a remarkable IPO for DoorDash. Shares priced initially at $102 closed the day 86% higher at $189.51. Airbnb goes today and if the DoorDash trading is anything to go by, there could be fireworks again. The company has priced its initial public offering at $68, well above the $44-$50 range estimated only last week.

Revenue growth was slowing for years and it’s never turned an annual profit, but Airbnb has not done as badly as peers during the pandemic and to some extent has made the private getaway more appealing than staying in a hotel/resort. The company made a profit of $219 million in the third quarter, on $1.34 billion in revenue. However, Experiences have not done as well as hoped – there was no breakout of the figures in the filing despite launching four years ago. The outlook is much stronger for 2021 now that vaccines are coming. Having been relatively resilient during the pandemic, Airbnb could kick on and benefit from the get-and-out-travel trend in 2021. Anyone for new highs for the Renaissance Capital IPO ETF?

European markets opened tentatively higher despite the drag from Wall Street and Brexit worries – sentiment remains broadly well supported due to the vaccines. Investors still largely positive on equities and on the whole probably believe that both a Brexit deal and US stimulus package will appear. The FTSE 100 was up 0.4% and testing the 6,600 level again in the first hour of trade on Thursday.

Ocado shares dropped 3% despite raising full-year earnings guidance as revenue growth slowed. Retail revenues rose 35% in the fourth quarter, down from 52% in the preceding quarter. Whilst still very strong, investors are perhaps just booking some profits now on the news. Having previously raised its full-year EBITDA guidance from £35m to £60m, management has again raised its outlook to £70m thanks to a very strong November led by continuing shift to online and lockdowns creating a perfect storm of demand for internet supermarkets. A lot of the immediate questions asked of Ocado have been answered and remaining questions will not be answered until next year and beyond. Profitability in its core UK retail market is not in doubt and capacity increases next year worth 40% will be a positive. M&S seems to be working. Key questions for next year and beyond are whether the shift to online continues as vaccines are rolled out, and can it really justify these enormous multiples based on the promise of future profits from its international deals for much longer?

Markets are looking ahead to a big slate of economic events and data today:

ECB: The European Central Bank is likely to announce fresh stimulus by way of expanding its Pandemic Emergency Purchase Programme (PEPP) by an additional €500bn and extend it beyond the current Jun 2021 cut-off to the end of next year. This is not likely to produce much volatility in EUR crosses as there was a strong pre-commitment at the October meeting to taking additional easing measures in December. As we said at the time, it’s all but a down deal now that France and Germany have locked down and the economy is heading for another recession. Last time Christine Lagarde said staff were working on recalibrating all instruments, which means even interest rates could be cut further in addition to expanding QE envelopes, however any tweak to rates looks unlikely at this stage.
Recent survey data has been soft and hard data for November when it comes is not going to be pretty. Q4 is shaping up badly, though Lagarde and co may now be willing to jump the shark on vaccines and prep for a rosier 2021 – which would suggest no dovish surprise from the ECB. Inflation remains very weak and has been stable at –0.3% since September.

The stronger euro exchange is another headache for the ECB – traders will be closely watching for any jawboning by Lagarde around the recent euro strength. We should also look for extension of TLTROs and upping the tiering facility to help banks. Lagarde will look to show that the ECB will stay super-loose for as long as necessary but will lean hard on the fiscal side too and not want to do too much. Moreover, the advent of vaccines will keep the ECB from over-doing it now. As ever, the announcement is at 12:45 GMT and presser follows at 13:30.

US CPI and weekly unemployment claims: After a tame reading for October, core and headline CPI are seen ticking up marginally to 0.1% over last month and +1.1% year-on-year for the headline number and +1.8% for the core reading. US inflation expectations have hit 18-month highs, but it’s not thought that we will see a material imprint on last month’s figures – expectations seem to be more about the coming Great Monetary Inflation caused by central bank printing and pro-cyclical fiscal stimulus in 2021 as vaccines allow the economy to bounce back. Nevertheless, the latest PMI surveys for November showed the quickest rise in selling prices yet recorded, with the rate of inflation hitting a record high in the service sector and a 25-month high in manufacturing. Inflation may be coming, but probably not until the pandemic is over.

Brexit heads to conclusion, European shares bounce after Wall St records

Morning Note

All eyes are on the Brexit talks as they reach the denouement of what’s been an over-long episode featuring as many twists and turns as an Agatha Christie mystery. Heading to Brussels today, Boris Johnson, a rather puffed-up Ustinov in the role of Poirot, is gathering the players for the final reveal: what is Britain willing to do to turn this insoluble mess into a constructive deal? Will the EU, faced with this revelation, say ‘alright gov, it’s a fair cop’ and give way too?

The government’s decision to ditch controversial clauses in the internal market bill may be an olive branch, but it does not solve the key hurdles on fishing etc. Sterling traded higher on some positive noises from Michael Gove early this morning, as he said there is room for compromise on fishing and that the UK could be ‘generous’ on who enters its waters. GBPUSD pushed back above 1.34 on the headlines but remains on the hook for less confident-sounding updates. The EU Council meeting begins tomorrow and really the bloc would prefer to focus on things like its budget and the pandemic, as well as future ties with the US.

Chart: GBPUSD trades higher above 1.34, resistance at 1.3540.

GBP is stronger on potential positive Brexit news.

A positive session on Wall Street set the tone for a firmer open for European bourses even as the clouds of Brexit cast a pall over the market and lawmakers in the US struggle to find agreement over much-need fiscal stimulus. The Dow Jones rallied over 100pts, or 0.4%, to close at 30,173.88, achieving an intraday high of 30,246.22 in the process. The S&P 500 rose 0.3% to 3,702.25 to close above 3,700 for the first time. Tesla shares rose again despite announcing another $5bn share sale. More cash for capital expenditure is viewed as a positive despite the dilution. In early trade on Wednesday, the FTSE 100 rallied almost 1% to above 6,660 to set another fresh post-pandemic high.

Vaccines are still the magic wand: As the UK’s vaccination programme begins, the Oxford University and AstraZeneca vaccine has been confirmed as being safe and effective in a Lancet study. The news further underpinned confidence in the reopening trade. Meanwhile the FDA has confirmed the efficacy and safety of the Pfizer/BioNTech vaccine, clearing the way for its imminent approval for use in the US.

Getting Washington to agree a stimulus package is appearing as intractable as Brexit. The latest offer from the White House is a $916bn package that has the support of Senate majority leader Mitch McConnel but was rejected by Democrat leaders in Congress who bemoaned the lack of enhanced unemployment benefits. A bipartisan package worth $908bn is still on the table.

British American Tobacco shares failed to rally despite a positive update and upgrade to full-year forecasts. Constant currency revenue growth is now seen at the upper end of the 1-3% range, with the US now expected to be flat versus previous guidance of -2.5%. Global sales seen at -5% vs -7% previously thanks to the sales ban in South Africa being lifted sooner than expected, whilst volumes held up well in developed markets and grew in emerging markets. Lockdowns have not been the ideal backdrop for smokers to kick the habit – many are even taking it up again. Combustibles delivered an ‘excellent’ performance, management said today.

Howdens shares leapt 8% after the company said FY2020 profits would be 10% above the top end of expectations, currently in the range of £123m to £152m. This implies profits of about £167m and comes after a very strong performance in November, with revenues up almost 19%.

Broker Upgrades/Downgrades PT
Wood & Company Wizz Air Cut to Sell 4,440p
Berenberg Cairn Energy Raised to Buy 200p
SSP Rated New Hold 335p
RBC Initiates Cranswick with sector perform 3,900p
Hilton Food Rated New Sector Perform 1,040p
Peel Hunt Bunzl Rated New Add 2,600p
SSP Cut to Hold 375p
Citi National Grid Raised to Buy 970p
HSBC Royal Mail Reinstated Buy 430p

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