Duncan Donald

Fri, Dec 18

With the UK and US awaiting significant agreements, markets bet on optimistic outcomes into year end

For the last few weeks when the time comes to summarise the week’s events and investigate what’s coming up in the week ahead, it’s felt like Groundhog Day with the key outstanding issues at a critical point seeking immediate agreement at a looming deadline. Nevertheless, agreement is prolonged to a new fresh critical deadline, yet markets are gaining traction towards the thought agreement.


This is exactly where we find ourselves again this week, with major indices persisting in the uptrend into year end with those risk safe haven currencies, namely the US Dollar slipping as the markets view critical agreement between Europe and the UK on Brexit and across the parties in the US bringing a stimulus deal.  


Brexit has dominated the newswires this week after no agreement was reached between Boris Johnson and Ursula Von Der Leyen last weekend. Whilst the sands of time drawdown, and as verbal assurances of a deal being reached shifted towards there being a greater chance of the UK departing the EU on Australian trade terms, we did start to hear that concessions were being made on the level playing field and governance issues from the UK and EU this kept GBP trading firm albeit aided by a weaker USD we saw GBP/USD reach the heady heights of 1.3600 not seen in 2 years.  


Despite the positive sentiment the outstanding issue remains fishing rights in UK waters. This contentious issue may yet derail the possibility of a deal, with crucial talks ongoing into the weekend and parliaments across Europe looking to get dragged back from the holiday period should agreement be sought. At this stage the UK are persisting with their hard-line approach to depart on WTO terms at the end of the year with no negotiations on the topic beyond that date. Naturally hard deadlines have come and passed and with all of them having been set by the UK and ultimately retracted due to ongoing optimism of agreement, this is why the markets perhaps remain unperturbed by such a tight deadline magnified by the looming holidays.  Naturally, the risk remains a collapse of progress and talks as we head into the liquidity vacuum of the holiday season, and this of course raises concerns but for now optimism prevails.


In the States the status of the much-needed stimulus plan almost mirrors the negotiation path in Europe, with the Republicans and Democrats seemingly making progress towards a plan verbally, yet micro daily deadlines for agreement still not quite getting there. There remains optimism that a deal will be reached today to halt a government shutdown and most importantly help those in need of this vital cash stimulus, highlighted by the ever-rising weekly unemployment numbers we are seeing. There was positive news early in the week as the Electoral College vote went to now firmly President Elect, Joe Biden. Yet despite this Donald Trump hasn’t shifted his desire to stir the pot on international relations before his departure early next year. US markets remain buoyant into year end with rotation present but not dominating as year end position squaring being absorbed by fresh vaccine optimism into year end, meaning 2021 will likely start at record market highs on many of the major indices.


The nagging doubt to the overriding optimism and focus on the post Covid promise brought by now deliverable vaccines is the case numbers that are in front of us. With global figures now indicating greater than 75 million cases worldwide the virus continues to accelerate across the western world. The inevitable mixing of households over the holidays at a time of heightened case numbers brings material risks. In the UK this week brought nearly two thirds of households into the highest level of lockdown with seeded hints of more stringent lockdowns post festivities. We have to expect cases to keep rising over the next months and be mindful there may come a confidence tipping point in the markets bringing short term pain back into focus over longer term optimism. 


The Week Ahead: 


Monday - A very light data day at the start of what will be a light week. Australian Economic and Fiscal Outlook and New Zealand's Credit Card Spending comes early in the session before UK CBI and Eurozone Consumer Confidence. 


Tuesday - Australian Retail Sales is first up before German Gfk and Import Prices. From the UK we get Current Account, Final GDP q/q, Public Sector Borrowing and Business Investment Data.In the US session we get GDP, Consumer Confidence and Home Sales Data then late on at the turn of the day Japan;s Monetary Policy Meetings minutes. 


Wednesday - Inflation Data from Japan starts the day. With no European data the US session brings GDP from Canada and Durable Goods, PCE Price Index, Personal Income & Spending, Weekly Unemployment and UoM Consumer Sentiment and Spending. 


Thursday - With Bank holidays across Europe and North America the only notable data is from Japan with CPI, Unemployment and Retail Sales as well as a speech from BOJ Governor Kuroda. 


Friday - Bank Holidays