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FTSE 100 continues to outperform despite France trade deal veto threats

US markets once again managed to post new record highs, on reports that US lawmakers were mulling a new $908bn coronavirus stimulus deal.

While this may seem like Groundhog Day for a lot of people, and we’ve certainly been here a number of times before since July, there is now increasing evidence that the US economy is starting to slow as we head into year end, against a backdrop of the deadliest day for US coronavirus deaths. This rise in fatalities, along with a weaker than expected ADP payrolls report, coming as it has on the back of two successive weeks of increasing jobless claims numbers, might be starting to make some less partisan US lawmakers a little bit nervous, which in itself could provide momentum for some form of deal by the end of this year. Bond markets appear to be taking their cues from that, with US 10-year treasury yields heading back to their November peaks, with the 10-year and 2-year spreads also widening back out to the widest levels in almost three years.

More evidence of the recovery of the Chinese economy manifested itself this morning with the latest Caixin services PMI for November, which rebounded to 57.8, from the 56.8 in October. Asia markets have seen a more subdued session after yesterday’s record US session, while markets here in Europe have opened lower, though the FTSE 100 is still outperforming after its big rebound yesterday on the back of the welcome vaccine rollout news. Other European markets appear to be underperforming as concerns rise about delays in approving a vaccine rollout for EU nations. It does beggar belief that in a public health emergency that EU leaders can procrastinate about a vaccine approval, in the name of a unified EU approach. Even a one-month delay in times such as these, when people continue to get infected and death rates are rising, comes across as ideological and reckless.    

We are also starting to see signs of strain among EU leaders as UK-EU trade talks move into the final strait. France is starting to sabre rattle, saying it could veto a deal if it doesn’t like the terms, a move that appears to be designed to exert pressure on Michel Barnier and EU negotiators not to give too much away when it comes to fishing. While some of this noise is no doubt designed for domestic consumption, the reality is if France were to veto a deal, French fishermen would lose legal access to UK waters completely in the event of a no-deal. A no-deal would also rebound viciously back into northern France, an area that already has very high structural unemployment. It could also be argued that the rise in tensions suggests that a deal could be getting closer, and it is this urgency that is creating a concern about any new compromises that might be needed to get a deal across the line.

While the pound has slipped sharply in the past couple of days as a result of this rise in tensions, it still seems that a deal or compromise is more likely than not, if only to avoid what could be significant economic disruption at the beginning of next month. This is something that leaders on both sides should be keen to avoid, given current economic circumstances and today’s awful services PMI numbers, however one should never underestimate the ability of politicians to prefer political ideology over economic pragmatism. This is why the next few days are crucial, and as such we should know by next week whether a deal is coming or not. This morning's latest November services PMIs illustrate how dire the economic situation is in Europe, with economic activity in Spain and Italy sliding further to 39.5 and 39.4 respectively. France’s economic situation is no better with the various lockdown restrictions in operation there, confirmed at 38.8.

Sainsbury's this morning followed the lead from Tesco and Morrisons earlier this week, and said it would also forego the business rates relief that it received from the UK government as the pandemic swept across the UK. The measure is expected to cost £410m this year and £30m next year, and that as a result underlying profit-before-tax is expected to come in at £270m for the year. Sainsbury's share price has moved higher on the back of the news. While the move is welcome, it doesn’t change the fact that the government needs to look at a business rates model that is outdated, and penalises bricks and mortar retailers in a way that online retailers don’t have to contend with. It's all very well criticising the supermarkets for taking taxpayers money, but let’s not forget that the retail sector wouldn’t be in anywhere near as much trouble, if it wasn’t for government procrastination over reforming business rates policy.

It’s been a difficult few month’s for bus and train operators, given the sharp falls in passenger numbers since the March lockdowns were introduced. When Go-Ahead Group reported its full-year numbers in September, the company reported a small profit for 2020, on full-year revenues of £3.9bn. Rail operating profit fell to £8.9m, largely down to losses in its German business and lower margins from its South Eastern franchise. The pandemic has continued to weigh on the business, with operating profit margins slipping back from 1% to 0.3%.

In August the company agreed another eight-week funding package with the Department of Transport of £218.4m for the provision of local bus services, while in September an emergency recovery measure agreement was signed by GTR for the period until September 2021, for its Southern and Thameslink franchises. The company this morning said that the outlook for 2021 had improved with an increase in expectations in its London and international bus divisions, though regional services were still likely to need further support. Management went on to say that 90% of group revenue is now secured, with no revenue risk from falls in passenger demand. Rail is expected to deliver a breakeven performance in the current financial year.

TalkTalk this morning said it was extending the deadline again in its talks with Toscafund Asset Management about a possible bid approach. The new deadline is now 17 December, where a new decision will be made about further progress.  

US markets look set to open broadly unchanged, after setting new records last night. Weekly jobless claims data could increase the pressure on US lawmakers to arrive at a stimulus plan by year end if, as expected, weekly jobless claims rise for the third week in a row. Last week saw a rise to 778,000, and while today's prediction is for a rise of 775,000, we could see a move back towards 800,000 given the continued rise in US coronavirus infection and fatality rates.

Snowflake's share price could see some early weakness after disappointment over its Q4 guidance led to some post-market weakness, in the wake of a slightly weaker finish. The Snowflake share price has made impressive gains from its $120 IPO price, peaking at $340 last week. There could be some further profit-taking when US markets reopen later.


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