While markets in Europe underwent a fairly mixed week, the FTSE 100 was notable as it moved to its best levels since March, driven up by a combination of optimism over the rollout of a vaccine, which begins this week, and the prospect of a possible EU-UK trade deal.
US markets also saw more record highs set, despite a rather disappointing US jobs report on Friday, which on the face of it prompted many investors to surmise that it would make US politicians more amenable to agree a new $908bn stimulus deal by the end of this week.
There have been worrying signs since the US election that the US economy is losing traction, while virus infection rates, hospitalisations and deaths continue to rise very quickly. With 12m Americans set to lose their Cares Act benefits at the end of this month, and the US labour force participation rate dropping back to 61.5%, the concern about a financial cliff-edge for US household finances has been rising, on both sides of the political aisle. This appears to have altered the political imperative about the prospects of an imminent stimulus deal, and as a consequence the calculation appears to be that we could see something agreed by the end of the week.
Asia markets seem to be making a similar calculation initially, though sentiment has soured a little on reports that the US is looking to sanction key Chinese officials over recent events in Hong Kong, in which some legislators were disqualified on the grounds of not being sufficiently loyal to the administration. On the plus side, the latest China trade numbers for November showed that imports rose by 4.5%, slightly less than expected but still the third monthly increase in a row, while exports rose by 21%, a big increase from the 11.4% in October, with sales of PPE and other medical-related equipment a decent proportion of that surge. The rise in exports was the biggest rise in almost three years, and was also driven by some seasonal demand for the likes of electrical and Christmas goods.
European markets look set for a similarly uncertain start as the latest EU-UK trade talks move into their final phase, in what is set to be a make-or-break week, with a possible ratification summit on 10 December. There has undoubtedly been a ratcheting up of the stakes in the last few days, with France threatening to use its veto, perhaps in a calculated attempt to try and exert its influence in the final terms, while the UK has also said it would not shift on its red lines of fishing, level playing field and oversight and governance. With talks resuming over the weekend, we’ve been treated with various outbursts of optimism from the likes of Ireland’s foreign minister, Simon Coveney, who was saying that a deal was 97% to 98% done, to the Irish prime minister saying that a deal was no more than 50-50.
Reports of a compromise over fishing have seen the focus now move to the level playing field as it has been called, which would dictate the level of divergence allowed between the UK and EU in any future trading relationship. France has said it is not opposed to some level of divergence, but that there needs to be a mechanism of sanctions in place if the divergence is considered excessive. If the issue of fish does fall away, and on that it depends on how you interpret the smoke signals coming out of the two camps, it then comes down to the levels of divergence, and the governance and enforcement mechanisms that both sides find acceptable. .
EUR/USD – having broken above the 1.2000 area last week the barrier to a potential move towards the 2018 peak at 1.2550 has been removed, with the next resistance sitting near the 1.2230 area. Any dips need to stay above last week's breakout level between 1.2070 and 1.2020.
GBP/USD – last week’s break above the 1.3320 area may have been significant in that the run up to 1.3540 exceeded the high seen a year ago in the wake of the general election a year ago, however the failure to sustain it is a concern, and could see the pound undergo a slide back towards the 1.3260 area.
EUR/GBP – broke above the 0.9000 area last week but we were unable to sustain a move up through the 0.9100 area. As such the bias remains for a return to the November lows, while below 0.9080. A move below 0.8980 opens up a return to the 0.8860 area.
USD/JPY – still in a broad downtrend with resistance at the 104.70 area, which if respected should see a return to the November lows at 103.81.