Markets Weekly Podcast - 23 Nov 2020
Time is ticking on the Brexit deadline. In this week’s Markets Weekly podcast Henk Potts, Market Strategist for EMEA, is joined by Sophie Wheeler-Traherne, Vice President of Government Relations - both from Barclays Private Bank. They discuss the increasing hopes of a UK deal with the EU, look at what this deal could look like and what realistically can be achieved in the remaining weeks.
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This week our host Henk Potts, Market Strategist for EMEA, Barclays Private Bank, is joined by Sophie Wheeler-Traherne, Vice President, Government Relations, Barclays Private Bank. They discuss what this deal might look like and what can be achieved in the six weeks before the deadline.
Henk Potts (HP): Hello it’s Monday the 23rd of November and welcome to the Barclays Private Bank markets podcast, the weekly recording that will guide you through the turmoil of the global economy and financial markets.
My name is Henk Potts, Market Strategist with Barclays Private Bank. Each week I’ll be joined by guests to discuss both risks and opportunities for investors.
This recording will last around about 15 minutes, and be broken down into three component parts. Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week.
I'll then move on to our focus section where I spend a few minutes discussing a specific investment theme. This week I'm pleased to say our special guest is Sophie Wheeler-Traherne from Barclays Government Relations.
We will discuss Brexit timelines and the chances of getting a deal. And finally I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.
Let's start off of course with markets last week. Risk sentiment oscillated between vaccine euphoria and virus reality. Somewhat of a familiar pattern actually played out. At the start of the week investors greeted the positive vaccine update with a wave of optimism.
Equity markets surged, the rotation into cyclical and value stocks extended. However, as the week went on the coronavirus data became more disturbing and fears that tighter restrictions would stifle the fragile economic recovery in the fourth quarter started to rise.
Markets, you could also argue, were shaken by rising tensions between the Federal Reserve and the US Treasury, this is after the Treasury secretary refused to extend the number of emergency lending facilities set up by the Fed.
In terms of market reaction headline numbers, well it was a negative week on Wall Street. The S&P 500 fell 0.8%, small caps have continued to outperform the technology sector over the course of the past month, the NASDAQ is up around about 8%, the Russell 2000 has returned nearly double that.
Europe continues to outperform the US: STOXX 600 is trading at a 9 month high, and was up 1.3% during the course of last week. In fact, its risen for three straight weeks, registering its longest weekly winning streak since July.
STOXX 600 is up around 14% this month, on course for its strongest monthly rally on record.
Of course vaccine confidence is the key driver. You could argue a little bit like London buses you wait a year for one to come along and then they all come through at once.
Clinical trials results showed a vaccine made by US biotech firm Moderna that uses the same approach to trigger immunity as the one created by Pfizer was highly effective at protecting more than 94% of the people participating in the trial.
Key additional features: results show it works well on the elderly, a group that is particularly vulnerable to contracting severe symptoms, it can also be stored at normal refrigerator temperatures for 30 days which should help with distribution.
In terms of the future process well Moderna expects to collate the trial data, submit it to regulators for approval in the next few weeks. In terms of capacity Moderna said it can make a billion doses by the end of next year.
What is the outlook in terms of the vaccine now? Well currently 50 companies around the world are working on vaccine candidates, 15 of which are in late stage trials. In the space of two weeks expectations of a viable vaccine have accelerated and the road to normality could well be radically quicker than previously forecast.
What does that mean? Well that means 2021 growth forecasts are being increased quite substantially but we still need to remain realistic about timeframes given the vast array of approval, manufacturing and distribution challenges that still need to be overcome, but vaccinations are expected to start in the next few weeks.
On the data front the real focus of course was on US retail sales. We should remember economic indicators in the United States have proved to be impressively resilient over the course of the past few months, certainly in contrast to what we've been seeing in Europe and given the backdrop of rising coronavirus cases.
However, figures for October showed that retail sales climbed at their slowest pace in six months. The value of total sales rose just 0.3% from the prior month. The report signals slowing consumption momentum after the robust rebound that we saw in the third quarter as the pandemic surges in a number of key states and the political impasse in Washington is holding back additional stimulus which of course could aid spending capability.
On the positive side online shopping remained very robust with growth of 3.1%. We could expect, I think, over the course of next couple of months private consumption data to deteriorate further if states are indeed forced to impose more shut downs and further restrictions, suggesting a weaker than previously forecast GDP print for the fourth quarter of 5% and potentially a flat first quarter next year.
But I think longer term the outlook for the consumer remains supportive, labour markets as we know have been rebounding, the savings rates have been significantly higher over the course of the past few months.
What does that tell us? Well, that suggests there's plenty of financial firepower as the path of the pandemic becomes a little bit more assured. For 2021 we expect US private consumption growth of 4.6% which would recover much of the contraction that we've seen during the course of this year.
The next big test for the US consumer of course will be demand over the important US holiday shopping season. It starts with Black Friday this week and is followed by Cyber Monday. Its estimated that one out of $5 in holiday spending is spent between Thanksgiving and Cyber Monday.
The other big headline grabber last week was around cryptocurrencies and Bitcoin. Bitcoin hit a three year high on Friday, trading above the $18,000 level for the first time since December 2017.
That represents nearly a 250% jump since January, getting close to that all time high of $20,000. Although we should remember of course Bitcoin’s 12-year history has been characterised by meteoric rises and equally impressive crashes, go back to 2018 Bitcoin lost 80% of its value.
Why is it rising now? Well you can take your pick from various explanations that have been proffered including diversification, we know correlation with other asset classes is slow, fears of currency debasement, distrust of central banks and perhaps even increased use of electronic payments.
Investors are certainly once again asking about Bitcoin but we continue to be cautious. As a currency it has not proved to be a reliable store of value, its limited as a medium of exchange, and we should remember of course it's not backed by an economy or regulated by a central bank.
As an investment it suffers from an inability to value, there's no cash flows or coupons that are generated. It also suffers from outsized volatility, lack of transparency and of course security issues.
Our view is that Bitcoin continues to be a speculative gamble and investors would do better to continue to focus on the underlying blockchain technology. So that's how financial markets finished at the end of last week.
Let’s move back onto Brexit now where of course the clock is ticking and there's no doubt that businesses are certainly getting nervous. Sophie good to have you with us today.
Sophie Wheeler-Traherne (SWT): Hi there, good morning, thank you for having me.
HP: We know there's now just under six weeks until the end of the Brexit transition period. In the EU, the UK is still negotiating what the future trading relationship will look like. Where are we in terms of those talks and what are the remaining barriers to getting a deal done before the end of this year?
SWT: Yeah so the talks continue this week, albeit virtually, as members of the EU negotiating team have had to go into self-isolation after one of their officials tested positive for coronavirus.
And it's a mixed picture as ever really with Brexit. There has been progress on converting the agreement into legal text, now said to be over 600 pages, but the sticking points still remain and these are the same sticking points which have really dogged the negotiation since the beginning of the year.
So fisheries obviously a highly political and totemic issue. A deal on fish was never going to be easy and this is all about European access to UK waters. Then we have the level playing field with a particular debate over state age and competition rules, with the EU very much concerned about the UK having an unfair advantage post-Brexit.
And then finally the overall governance of the agreement - so how will the deal actually be enforced. These are the three remaining sticking points with regards to the negotiations and you may have seen the comments from Commission President Ursula von der Leyen over the weekend.
She said there had been more movement on these problematic issues, so maybe some hint of optimism there, but then she did go on to warn that there were still some metres to the finish line to reach an agreement.
So, in general, it does appear that both sides may have reached the limits of their political room for manoeuvre over these key sticking points and there are reports that Boris Johnson is preparing to make a significant intervention in the talks this week with a possible phone call to Commission President Ursula von der Leyen to try and reach a compromise.
HP: Well as we know of course time is certainly running out now. The 31st of December is the end of that Brexit transition period. So take us through the timeline. What does it look like up until that date and when can we expect a deal, if indeed we're going to see one?
SWT: Yeah absolutely, so timing is really the key issue now. As you said, there are now just under six weeks till the end of the Brexit transition period and any trade deal will need to get political agreement from obviously UK and EU leaders, but then it does need to also be ratified by the UK Parliament and the EU Parliament.
Now both sides would like to give their respective parliaments around two to three weeks for ratification. The UK will need to draft the implementing legislation, the EU will need to translate the deal into the official EU languages, hold various committee votes and then a final European Parliament plenary vote.
And both sides, you know, would really like to avoid having to sit over Christmas. There is speculation this morning that the European Parliament is preparing for an extra plenary session between Christmas and New Year's Eve to give its consent to a possible deal and this could be held on the 28th of December but that's not confirmed yet.
And this roughly leaves the next two weeks to get a deal. Whether we consider the end of November or early December as the deadline for a final deal, it's clear we're very much nearing the crunch point for the negotiations.
But, you know, keep in mind there is no hard deadline or cut-off date for reaching a deal and in theory there are ways that this timeline could be stretched even further.
HP: Thank you. So listen given the importance, as we know, of this week what should we be keeping an eye out for in the coming days?
SWT: I think absolutely look out for that possible phone call between Boris Johnson and Ursula von der Leyen I mentioned. As I said, the talks were at a point where perhaps there is really kind of nothing more the negotiators themselves can do.
They can't cross their various red lines so it will require a high level political intervention to get this deal done.
This would sort of be similar to the Varadkar moment we had back in October 2019, when there was that private meeting between the Irish Prime Minister Leo Varadkar and Boris Johnson and if you remember they had that photo walking through a garden in the North West of England and that was the moment that they made a deal to get the withdrawal agreement over the line.
So we could see a similar moment obviously over the phone this week.
I also think there is a lot of speculation this week already about possible compromises, where that political compromise could land, so look out for more briefings to the media about these.
So, for example, there's speculation about whether a sunset clause could help get the deal over the line. So essentially, any deal would only be agreed for a temporary period, potentially seven years since this would coincide with the end of the next EU budget but this is just speculation at this stage.
So, you know, I guess whilst every week seems to be important with regard to these negotiations, considering how close we are to the end of the transition period and the time needed to get a deal ratified through the European and UK parliaments, it does seem like this week could be an important moment in terms of getting a deal across the line.
It might not be all done and dusted this week, but it could be a crucial point in terms of making significant progress towards that deal.
HP: Well, thank you Sophie for giving us your insights today, I'm sure that we will be relying on you over the course of next few weeks to keep us updated on what could be a dramatic conclusion to the Brexit saga.
Moving beyond Brexit, investors this week will focus on, in terms of major events, the UK spending review and the office for budget responsibility's new forecasts which come out on Wednesday.
Well the message is likely to be short term gain in terms of government spending but lots of long term pain for the nation's finances. The focus will be on any further emergency virus-related policies for 2021-22, details of the government's investment infrastructure plans, and hints at the need for future fiscal consolidation.
The OBR is expected to confirm the worst performance for the UK economy in 300 years with an 11% contraction in 2020.
Also we’re likely to find estimates of the amount of economic scarring on the public finances from the pandemic, with debt exceeding the size of the economy for the first time since the 1960s and the UK economy not expected to recover to its 2019 peak before the end of 2022.
In terms of data, November flash manufacturing and services purchasing managers’ indexes in the eurozone, UK and US will help to gauge the continuing effect of the pandemic on economic activity.
Services as we know has been much harder hit by the COVID crisis, with services in the eurozone contracting for the second consecutive month in October and signs of slowing growth apparent in the UK.
The strength of the US services in October was surprising, it seems likely this will weaken in the coming months. Composite output in all three regions is expanding with weakness in services supported by stronger manufacturing performance.
October's UK house price growth continued the momentum established in August and September. An annual rate rise of 5.8% was the highest since January 2015. Prices were also up 0.8% month-on-month from September. November data from the Nationwide will confirm whether the re-introduction of national lockdown has indeed reversed that trend.
With that I would like to thank you once again for joining us. We hope that you found this podcast interesting, informative, and its given you some ideas around the key Brexit milestones to watch out for over the coming days and weeks.
We will of course be back next week with our latest instalment, but for now may I wish you every success for the trading week ahead.
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