US markets saw another set of records for the S&P 500, Nasdaq, as well as the Russell 2000, after a poor weekly jobless claims number, cemented investor expectations that US politicians would be pushed into passing some form of stimulus program by year end, or risk that 12m Americans would lose their Cares Act unemployment cheques at the end of the month, without receiving any new help.
Yesterday saw another decent day for European markets with the exception of the FTSE 100, which slipped back in late trade, on concern over the whether we might see an EU-UK trade deal concluded over the weekend. Asia markets have finished the week slightly on the back foot, after the Bank of Japan further extended by six months its special corporate financing program in the face of rising cases across Japan, and the rest of Asia in general. This weakness looks set to manifest itself into a similar soft open for markets in Europe as we head into what could be a milestone weekend for EU-UK trade talks.
For most of yesterday there had been rising optimism that the talking between EU and UK negotiators was heading into the final strait for a possible weekend agreement, however this optimism started to diminish just before the European close, and continued to ebb away further as US markets were closing. The divergence between the comments from EU negotiator Michel Barnier earlier in the day, which had expressed optimism about the prospect of a deal by the weekend, and the subsequent downbeat pessimism of Michael Gove, followed by UK chief negotiator David Frost, as well as PM Johnson as markets were closing last night, were a little hard to square with what markets are pricing in. The talks appear to be stuck on some elements of the level playing field, namely around the EU’s €750bn economic recovery plan, as well as the thorny issue of fisheries, and with the European parliament setting a deadline of this Sunday to be able to ratify the current text of a deal, it is possible that 2021 could well see various contingency plans swing into operation, before a final deal can be ratified.
Boris Johnson went on the record by saying that the EU’s stance on fishing was not reasonable, and that the talks could well founder unless the EU shifted substantially on its current position. This suggests that the European parliament's deadline for this Sunday could well slip, which means that any deal that is agreed between now and the end of the month could well end up not being formally ratified until well into January, with the inherent problems that might bring. It still seems more probable than not a deal will be agreed, and this is just the latest in a choreographed tap dance by both sides to ensure that when a deal is done, both sides can claim that they went to the very end to extract every last concession. At the risk of sounding like a broken record, neither side can afford a no deal outcome, given the current economic circumstances, and for that to happen would be a serious failure of statecraft.
Yesterday the UK government imposed further tighter restrictions on a bigger part of south-east England in response to a continued rise in coronavirus cases, following from similar hard measures this week that have been implemented in both Germany and France into next year. This morning's UK retail sales numbers are expected to show the effects of the tighter restrictions imposed across the UK in November, with the first negative print since April. Since the lockdown in April, we’ve seen six consecutive months of decent gains, however after a surprisingly strong 1.2% gain in October, this sequence of gains is expected to come to a shuddering halt with a 4% decline due to the lockdown restrictions that were put in place from 5 November.
The better-than-expected performance in the October numbers was in part fuelled by a pull forward effect from November as consumers tried to do all their November pre-Christmas shopping before the lockdown began due to concerns it might get extended up until Christmas. It’s hard to estimate how bad the November numbers could be given that a lot of shopping will have moved online, while there may well have also been a significant amount of turnover in the lead up to lockdown.
The most recent BRC retail sales monitor was surprisingly not as bad as feared, posting a 7.7% rise in November an increase on the 5.2% rise seen in October. This might suggest that despite the lockdowns closing bars and restaurants, which saw a 56% decline in spending there, the 47% boom in online sales could help to compensate. Sales of electronic items also rose with the rollout of the new Xbox and PlayStation 5, which suggests that despite pessimism around the November numbers, we could see an upside surprise, however it is unlikely to be a positive reading.
We also have the latest Germany IFO Business survey for December, which may not give an accurate reflection of sentiment given this week’s late decision to impose a sharp lockdown into next year by German Chancellor Angela Merkel. Expectations are for a slight slowdown from November's 90.7 to 90.
EUR/USD – making a new two and a half year high as it moves through 1.2230 on the way for a move up towards 1.2550. Needs to stay above support at 1.2060/70 to maintain upward bias towards 1.2550. Only a move below 1.2020 negates the upside scenario
GBP/USD – a new two year and half year high above 1.3600 puts us on course for a move towards the 1.4000 level. The pound still remains well supported, with the key support still down at the 50-day MA and 1.3130 area, and interim support at 1.3420..
EUR/GBP – still finding support just above the 0.8980 area, however the bias remains for a move lower. A break below here argues for further losses towards 0.8880. Resistance remains back at the 0.9150 area, and behind that at 0.9200.
USD/JPY – has moved below the November lows, with a move through 103.00 targeting a move towards the 100.00 level. Resistance sits up near the 104.70 area.