Markets have paused this week, with the rotation into more cyclical stocks slowing down whilst Covid19 still rages across many countries and social distancing looks set to remain with us for several more months. Brexit, four years on from the EU referendum, has come to the front of investors minds, as the risks of ‘no deal’ have seemingly increased this week, with Sterling losing ground.
The week began on a bright note, with news that Chinese exports in November grew at their fastest pace this year, helping China to record its highest ever monthly trade surplus. Britain dropped controversial parts of a bill that breach its EU withdrawal treaty, raising hopes that a compromise may be possible with Europe. Whilst the European Central Bank expanded its €1.35 trillion emergency bond-buying programme by another €500bn and extended it until March 2022 and maintained its deposit rate at minus 0.5%.
However, by Thursday, following negotiations over dinner between Prime Minister Boris Johnson and European Commission president Ursula von der Leyen, differences over future regulatory equivalence and fishing rights were preventing a deal being agreed. This led to Boris warning the UK to prepare for a ‘no deal’ Brexit, whilst similarly, von der Leyen, reported back to the EU summit on Friday that ‘no deal’ was a high probability.
European shares fell on concerns about the rising numbers of coronavirus cases in key economies and uncertainty surrounding a post-Brexit trade deal and U.S. stimulus measures. In local currency terms, the pan-European STOXX Europe 600 Index ended the week about 1.00% lower, while Germany’s DAX Index fell 1.39%, France’s CAC 40 declined 1.81%, and Italy’s FTSE MIB tumbled 2.15%. The UK’s FTSE 100 Index was flat.
In the US, major indexes hit new highs on Wednesday but pulled back to end the week mixed. The small-cap Russell 2000 Index outpaced the large-cap S&P 500 Index for the fifth consecutive week and recorded a modest gain. Within the S&P 500, the energy sector outperformed by a wide margin, as international (Brent) oil prices crossed USD 50 per barrel for the first time since the onset of the pandemic. Information technology and real estate shares underperformed. The week was also notable for the initial public offerings (IPOs) of Airbnb and DoorDash, two of the largest to date in 2020. Shares in both internet companies rose sharply once trading began.
China equities fell on renewed tensions with the U.S. after a second major index provider removed some Chinese companies from its benchmarks following a Trump administration executive order. The large-cap CSI 300 Index sank 3.5%, its biggest weekly drop since September, and the Shanghai Composite Index shed 2.8%. Sentiment weakened after S&P Dow Jones Indices (S&P DJI) said it would remove 21 Chinese companies from its global stock and bond benchmarks after the U.S. Defense Department earlier this year designated the companies as having ties to China’s military. The move by S&P DJI followed a similar decision by FTSE Russell the previous week and comes as other index providers, including JP Morgan, MSCI, and Nasdaq, are deliberating whether to do the same.
UK gilts strengthened over the week as the yield on 10-year gilts fell from 0.35% at the beginning of the week, down to 0.16%. Similarly, German bunds fell from a yield of minus 0.55% to minus 0.64%, with yields moving inversely to price. US Treasuries also strengthened a little over the week, with the 10-year yield falling to 0.89% as initial new jobless claims climbed to 853,000 last week, up from 716,000 the previous week, as a surge in coronavirus cases has led to a new round of lockdowns in the US.
Crude oil continued to strengthen as markets have become increasingly positive on vaccines, with Brent crude now trading at $50.0 a barrel. Copper, considered a barometer to the strength of global GDP growth, continued to strengthen, now having risen over 60% since its March low.
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