Markets Weekly podcast - 30 Nov 2020

Welcome to your Markets Weekly podcast. Our host Henk Potts, Market Strategist for EMEA at Barclays Private Bank discusses these record gains, the Spending Review in the UK as well as the ongoing Brexit negotiations. He’s joined by Jai Lakhani, Investment Strategist at Barclays Private Bank, to talk about the outlook for crude prices.

Henk Potts (HP): Hello it’s Monday the 30th of November and welcome to the Barclays Private Bank markets weekly podcast, the 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, and each week I'll be joined by guests to discuss both risks and opportunities for investors.

This recording will last around 15 minutes and will 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 Jai Lakhani, he's an investment strategist with Barclays Private Bank.

We will discuss the supply and demand dynamic for oil, the likely result of this week's OPEC meeting and crude forecast for 2021. Finally, I will conclude by previewing the major events and data releases that are likely to shape the week ahead.

But let's start by reflecting on markets last week. Investors gave thanks last week as equity markets surged to record levels: The Dow Jones broke through the 30,000 level for the first time, the Russell 2000 hit a record high.

It’s certainly been a November to remember. Global stocks are on track for their best month on record, up 13%. This is as US political uncertainty diminished, clinical trial results continue to paint a positive vaccine picture, central banks promise future action, although gains were tempered as the virus toll continues to mount.

We saw record daily cases in the US and Germany reported last week. Economic data reports remain mixed against the backdrop, of course, of elevated valuations, investors still remain a little nervous.

Investors did welcome the reduced political uncertainty in the United States, this is as the General Services Administration acknowledged Joe Biden as the winner of the presidential election, which means the formal transition process can start giving him access to government officials and funding.

Markets also rallied on the proposed appointment of Janet Yellen as Treasury Secretary. She's certainly a known quantity to markets: vast amount of experience, she's not expected to introduce a radical regulatory agenda, and will offer a coordinated policy approach with the Treasury and the Federal Reserve. She's also been a public supporter of more fiscal spending.

The vaccine trade continued to play out for much of last week, money flowing into those virus-hit sectors and cyclicals led by the likes of the banks, energy and travel. In terms of weekly performance, the S&P 500 was up 2.3%, in fact closing at an all-time high on Friday, it's up 13% year to date.

Over in Europe the STOXX 600 was up 0.9%, it's up 15% during the course of November. Safe havens were broadly weaker, gold sunk to a four-month low in fact trading below $1800 an ounce level, dollars also weakened.

Brent crude trading around the $45 mark, this is likely course to be buffeted this week as OPEC meets. And those wild swings in cryptocurrency space continued. Bitcoin hit a $19,000 level on Tuesday within sight of record highs then dropped into correction territory by midweek.

Explanations for the retracement include profit taking after the strong rally, speculation about tighter regulations in the United States, but we should remember even with the retreat Bitcoin has more than doubled during the course of this year.

In terms of data, US reports were a little bit mixed last week. Weekly job claims registered their first back to back rising weekly jobless numbers since July, adding to concerns of a stalling labour market recovery.

The trade deficit widened; although durable goods orders ticked up, manufacturing and housing data remains robust.

Minutes from the latest meetings at the Federal Reserve and the European central bank pointed to the prospect of further support. If you look at the Fed minutes those showed the US central bank decided immediate adjustments to the pace and composition of asset purchases were not necessary but were ready to make changes if circumstances changed.

We expect the Fed to alter its forward guidance around the time frame for asset purchases at its December meeting but not go as far as changing the monthly pace of asset purchases or the composition of purchases.

European Central Bank minutes signalled the prospect of additional monetary stimulus. They highlighted the growth outlook has deteriorated due to coronavirus restrictions. That risk of a double dip recession certainly looming large.

The European Central Bank said financial conditions for banks and smaller businesses are tightening, demand for loans and availability of credit are both contracting. At its December 10th meeting, the European Central Bank is expected to extend its bond buying programme by 500 billion euros and cut the targeted long term refinancing operation rate, to encourage greater bank lending to the real economy.

In terms of events, well it was the British chancellor standing at the despatch box to deliver a spending review, that illustrated the full extent of the devastation that the pandemic has wreaked on the UK economy and the nation's finances that grabbed the headlines.

Rishi Sunak using the office for budget responsibility's figures said the UK economy will suffer the deepest recession in 300 years, contracting by 11.3%, and the contraction he said won't be recovered until late 2022.

In terms of long term scarring to the economy, it means it will be 3% smaller in 2025 than predicted earlier this year, with unemployment set to hit 7.5% next year.

However, the spending continues to be ramped up to aid the economic recovery with support for jobs, £27bn pounds on infrastructure investment over the course of next two years, billions to ensure the health service can deal with resurgent virus, also a big uptick in defence spending.

If you look at the nation's finances the accounts show the debt and the deficit has ballooned to record peacetime levels. UK borrowing is likely to come in around £400bn this year, that's 19% of output. The government plans to issue £485bn worth of bonds this fiscal year.

If you look at the OBR forecasts they highlighted the potential impact on the recovery of a no deal Brexit, suggesting in that scenario unemployment could peak at 8.3%, be a longer road to recovery well into 2023, and deeper long term scarring somewhere around about the 5% level.

Speaking of Brexit, we know the clock is ticking and there's still no deal agreed.

This is as the UK and the EU continue to clash over a number of areas including fishing rights specifically, but alongside that state aid rules and regulations, the level playing field commitments, and the Northern Ireland protocol.

Despite these barriers however 95% of the treaty is said to be final, as both sides are still keen on doing a deal and that I think still remains the most likely outcome.

So much so actually, there has been a focus on creative ways in which to get a deal across the line, one method being discussed is the idea that any deal is only agreed for a temporary period, perhaps seven years, since this would coincide with the end of the next EU budget.

A mixture of reviews and sunset clauses could allow a degree of much needed flexibility and fudging on both sides. If the timetable slips even further there is talk of the European Parliament preparing for an extra session between Christmas and New Year's Eve to give its consent. This could be held on the 28th of December.

So no doubt, as always is the case, these European negotiations are likely to come down to the wire. We would remind you though we still believe a deal is achievable, even likely, but by no means inevitable. In the meantime, no deal planning will need to be accelerated.

So that's how financial markets finished at the end of last week. Let's move on to energy markets. Oil, as we know, has had a turbulent 2020 which at one point saw WTI (West Texas Intermediate) futures contracts trading at an unprecedented -$37, albeit momentarily.

With OPEC (Organisation of the Petroleum Exporting Countries) initially failing to come to an agreement and then coming back to the table to agree substantial supply cuts, the question for investors is what does 2021 have in store for the commodity. So we delve into the oil market fundamentals and give our view on how investors should be positioned. Jai, good to have you with us today.

Jai Lakhani (JL): Thanks Henk, happy to be here.

HP: So as we know, oil has certainly had a volatile 2020 to say the least. What has been the reasons for this? Please talk us through the key factors behind the movements that we've been seeing. What does the supply and demand dynamic currently look like?

JL: Sure, so the oil markets started the year in the backdrop of Venezuelan tensions, conflict between the US and Iran, and COVID-19 rearing its ugly head. Nobody really envisioned global economies grinding to halt as a result of this and this had a detrimental impact on oil, and the hit to demand from the pandemic was unprecedented.

At the same time, as you mentioned just now, OPEC+ initially struggled to commit to supply cuts, triggering a price war. Combined with inventory storage issues, we actually saw the benchmark WTI (West Texas Intermediate) crude futures hit a record low, briefly slipping into negative territory in April.

Since then we have seen OPEC+ come back to the table, which will discuss next, and agree unprecedented cuts. Economies reopened in Q3 and oil has now moved back towards the 45 price level.

HP: Thank you. So we know, of course, there is a big meeting taking place during the course of this week with OPEC coming together.

Normally this is held around the Christmas markets in Vienna but with COVID restrictions of course it's going to be virtual.

What can we expect from the meeting this week Jai, and give us some more thoughts around what the alliance is likely to be thinking about as it goes through 2021?

JL: Sure, so I think, as we mentioned, the initial struggle to commit to supply cuts in Saudi Arabia triggering a price war, really did question the integrity of the group.

It was then juxtaposed, with them agreeing an unprecedented total of 10 million barrels per day barrel of cuts, in May and June and Saudi Arabia going further with that with 1.2 million barrels per day, and then 7.7 million barrels until the end of the year.

But a big question over these agreed cuts was would all members comply with them? And for the most part the resounding answer is yes, with any members who initially undercut, making up for it in the proceeding months.

As we are aware however, the demand picture remains incredibly weak and so the group probably needs to go further in the next few months and this meeting will be key for that. It is therefore encouraging that they have said in the past that further supply cuts next year, they are likely to do, if it is necessary and this is something that will be the focus of this meeting.

HP: Thank you. So let's switch our attention to the outlook for the oil market. What should investors be aware of as we look into next year?

JL: Okay and when we look at this, when we assess the outlook, it is very important to remember that commodity prices do not anticipate growth but reflect supply, demand, and inventories of oil.

On the supply side there are two dynamics to consider: these are the self-imposed supply cut for OPEC+, which we've discussed, and how much the low oil price weighs on the financial health of other producers.

On this front we've seen Brent crude go to its lowest level since 2016 and we've seen oil rigs in the US plunge to well below that at the start of 2020. However, inventories are an issue, given that despite this, US inventories are still high and in July the crude oil stockpiles are more than 20% above the five-year average.

They were also over 10% above the maximum inventory at the same point over the past five years. We've also had production continue now in Libya, as well, and this is going to add to inventories.

Turning to demand and in the current backdrop this is very tricky. OPEC predict demand will fall in 2020 to the tune of 9 million barrels per day, and current lockdowns in UK and Europe and surging cases in the US is a concern.

However, the vaccine news and the rolling out of it globally, should help in the second half of 2021.

Putting this all together, short-term investors, should look out for range bound and volatile oil market, but in the medium to longer term, strong and resilient economic performance in China, the vaccine rollout, and economic activity coming back to normal and recovering, could mean oil ends the year strong.

We forecast Brent crude averaging 53 for next year and moving above 60 in Q4.

HP: Well thank you Jai for giving us your insights today. We know energy prices have a major impact on economies, business models, and of course financial markets and we will continue to evaluate the outlook.

Let's move onto the week ahead. Markets will be awaiting the data from the crucial start of the holiday shopping season from Black Friday to Cyber Monday.

Initial figures out of the US by Adobe Analytics, points to record spending online, up 21.6% over last year. Apparently key items include gaming consoles, Lego sets, Hot Wheels and technology.

The big number this week of course is to be November’s nonfarm payroll, which will offer key information on the recovery of the US Labour market.

October, to remind you, was the sixth consecutive month of job gains with the job market recovering from that record 20.8 million job losses in April. However, the momentum of gains has slowed quite considerably in recent months, with only 638,000 jobs added in October.

For November we think that trend continues, the US economy created 500,000 jobs last month, but that will see the unemployment rate ease down to 6.6% from 6.9%. We look for average hourly earnings to rise by 0.1% month-on-month.

November’s final manufacturing and services Purchasing Managers Index (PMI) in China, the eurozone, and the UK will likely confirm the slowing in recovery indicated by the flash readings.

Though the manufacturing sector continues to show growth, flash composite readings for the UK and the eurozone fell into contractionary territory due to services weakness, caused by the national lockdowns.

However, the flash data for the US significantly beat expectations with business activity across both manufacturing and services rising at the strongest rate since March. The final PMI reading for the US will likely confirm the surge in demand post-election.

The devastating impact of the pandemic on the eurozone's economy is now starting to filter through to the labour market, though job losses are being tempered by support schemes.

Europe’s unemployment rate is expected to pick up to 8.4%, when the figures are released on Wednesday. The eurozone's October retail sales data will also provide further insight into the uneven recovery in the area.

Eurozone retail sales dropped 2% in September, that's the biggest decline since the record slump seen in April. Surprisingly online trade in September slumped 5.5%. This worrying data, suggests European consumers are restraining their spending due to increased uncertainty around the pandemic.

So they are the key elements to watch out for as we look forward to the week ahead. With that I'd like to thank you once again for joining us.

We hope you found this podcast interesting, informative, and it's given you a guide as to the key drivers in the energy market over the course of the next year.

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.