Markets Weekly Podcast - 9 Nov 2020

This week our host, Henk Potts, Market Strategist for EMEA, Barclays Private Bank, is joined by guest speaker Christian Keller, Head of Economic Research, Barclays Investment Bank. They discuss what the election result means for investors, including why emerging market assets may benefit. They also assess the health of the US labour market and its impact on private consumption.

Henk Potts (HP): Hello it’s Monday the 9th November and welcome to the Barclays Private Bank 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 for 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 about 20 minutes. Firstly, we’ll analyse the economic and financial market ramifications of the US election. In the quest to do so I'm pleased to say we are joined by Christian Keller, Managing Director, Head of Economic Research for Barclays Investment Bank. I’ll then look beyond the US election to consider the outlook for the UK economy and the expected monetary policy response.

I’ll also analyse the health of the US labour market and its impact on private consumption. Finally, as always, I'll conclude by previewing the major events and data releases that are likely to shape the week ahead.

Let's start with the US election. The founding fathers appreciated the need for a system of checks and balances to ensure that no one branch of government would become too powerful. And so apparently did investors last week as markets shook off early election confusion and bid up both equities and government bonds.

The US presidential election was much tighter than many pollsters predicted and the ‘blue wave’ failed to emerge. Whilst the balance of power in the US Senate will be determined by run-off elections in Georgia in January, Republicans are expected to maintain control.

Should investors welcome the gridlock? Well, if you look at Bloomberg data, it suggests that it's good for equity market returns. If you look at the average annual S&P performance with a divided government return is 12.5%, with a blue wave it's 11.8%, but with a red wave it’s all the way down to 7.8%.

The close race and expected split legislator nature is likely to have ramifications for the Biden administration’s implementation of its domestic policy agenda. Aggressive tax hikes are likely to be tempered, the regulatory risk overhanging the technology sector is expected to ease, and a tighter more focused stimulus package is expected to be agreed.

However, we still expect Joe Biden to push ahead with some of those broad policy objectives including measures to invigorate the middle class, commitments to affordable healthcare, and the development of workers’ rights.

The president elect is also expected to place greater emphasis on global policy areas such as climate change, international institutions, and the promotion of shared values. He is also anticipated to start, I think, with a series of emergency stabilisation policies related to COVID-19.

In terms of market performance where US stocks recorded their biggest weekly gain since April - if you look at the four-day rally it added more than one and a half trillion dollars to the value of stocks. The S&P 500 was up 7.3% over the course of the week; technology, healthcare very much leading the way, in fact the NASDAQ was up 9.4% last week.

A similar picture in Europe as well, stocks posting their best weekly gain since June - STOXX 600 was up 7%. Reduced prospects of an immediate multi trillion-dollar stimulus bill have helped to ease anxiety over the risk of future inflation, pushing yields lower. 10-year Treasury yield traded below 0.8% in the middle of the week although picked up on Friday on the better than expected jobs report.

Money flowed out of the safe haven US dollar as fears of a contested election reduced. Alongside the election of course the Federal Reserve promising to keep interest rates low for a prolonged period of time as COVID cases rise. The dollar index was down 1.9% last week, in fact registering its sharpest weekly decline since late March.

Gold, as we know, moves inversely to the US dollar - weaker dollar makes gold less expensive for foreign denominated buyers. Gold hit a seven week high on Friday, for the week it traded up 3.5%, this morning trading around the $1950 announced level.

So that's how markets finished off last week. Let me bring in Christian Keller at this point. Christian good to have you with us today.

Christian Keller (CK): Pleasure to be with you Henk.

HP: Christian please start off by giving us your reaction to the US elections and from a policy perspective, what is now realistic for the new Biden administration?

CK: I think this election was very much an election that empowered moderates on both sides and they will now have to find common ground. And we have to ask ourselves where that common ground will lay and it will not be a very large fiscal COVID relief package as markets had expected if there had been the ‘blue wave’ where Democrats had won the presidency, the House and also the Senate.

So these visions of two to three trillion dollars’ worth of fiscal stimulus will unlikely happen. We are now pencilling in just $500 billion in the first quarter. That's from our US economists and that is probably on the low end of the range of forecasts where people believe will still be the package that comes, maybe it's around a trillion, maybe it will still be passed before the end of the year, but it will be some kind of COVID relief but much smaller than, you know, a blue wave would have produced.

Then secondly, a lot of the so-called progressive ambitious policies that the Democrats had envisioned with regard to the healthcare system, with regard to revamping the tax system, in particular increasing taxes, are very unlikely to pass if you don't have a Senate Majority and you know it doesn't look as if they look to have it. So what can the administration do?

They definitely can work on so-called technical fixes with regard to these areas but what will in particular happen is, President Biden will focus on some of the things where he has executive power and that is that is trade, that is international relations, that are some of the regulatory issues and there, you know, we think there will be an emphasis on multilateral approach with regard to trade and definitely an improvement of the transatlantic relations with regard to NATO.

There will be definitely a shift with regard to climate policy, joining the Paris accord again, so these are the things that most likely will happen under Biden administration, in particular the beginning. Then after two years, after the so-called midterm elections, if the Democrats should then win large larger majorities in particular in the Senate possibly we could see something more ambitious, if there is still appetite for it then.

HP: As you mentioned one of the key elements markets will be focusing on the start of next year or perhaps even at the end of this year will be the size and the shape of the fiscal stimulus package. How effective will it be in terms of influencing America's future growth profile?

CK: That's a good question because markets were quite excited about it, either way about the size of it, but ultimately these are really cyclical responses to the current COVID pandemic and the ailing economy at the moment.

If you think as an investor about longer term growth and you know where the rates are going, that is more an issue of structured policy and in particular of in what way they can influence productivity growth.

And productivity growth has been quite low since the beginning of this of this Millennium and the main question for longer term year’s growth is whether that may pick up in the future.

And that has to do with regulation but in a large extent also with technological breakthroughs which sometimes are very difficult to predict, as its often not only the invention of something but when that invention actually becomes what we call a general purpose technology so, you know, those things will actually play a bigger role then the question whether we get a 500 billion or two trillion package, at least in the longer term.

And I would say to that also one, make one remark, those who are opposing these very large fiscal packages they are actually thinking of the longer term, they say well they will increase the debt by a lot and if we cannot rely on interest rate being very low forever, couldn't it be that whatever we do now with a big fiscal package to boost growth could hurt us in the longer term through higher debt.

HP: Well thank you. Let's now start to think about what the US election means for investors. How should they be positioned from an asset class perspective?

CK: That's a fair question, and I think markets have to some extent already given us a little bit of that answer in the last few days with a very quick reaction. And let me go through a few points from the broader more abstract to the concrete. And first of all markets do not like uncertainty and, you know, that has now been removed and I think that is generally a good outcome for risky assets and we've seen this to some extent, but you know there's probably further room to go for risk assets to rally.

Second, the big news is that we do not have that ‘blue wave’ in the US that would have brought us a very large US fiscal stimulus. That stimulus in turn, or the anticipation of it, it actually led to large sell off in the US Treasury debt market as people anticipate a lot of issuance and lot higher debt and higher fiscal deficits.

If that is not coming, you know, US government bonds should be doing better, that already has happened to some extent and this also relates to the question of monetary policy. So if there is no expectation of a large fiscal stimulus, if there are problems in the US economy it is now the expectations that the Fed has to do more.

What does the Fed do? It typically buys more assets, more US government bonds, maybe also at the longer end. So the so-called yield curve should be lower and potentially flatter.

That in turn brings me to the next point. If you do have a monetary policy by the Fed that is looser, that tends to weigh on the dollar, so we should have a US dollar that will tend to be weaker rather than stronger.

And then of course there's a lot of implications for global assets outside the US, in particular in emerging markets. A combination of where you have a looser US monetary policy associated with a weaker dollar and a new administration that is much more traditional when it comes to supporting multilateral trade and will be a lot more predictable when it comes to global trade relations.

That is of course good for assets in economies that are open and that are participating in global trade, and I think we saw some of this already in Asian equity markets where by the way we also see a Chinese economy that continues to recover quite well from the COVID pandemic.

If that means in generally a better outlook for growth, it helps also commodities. And maybe one last point, even though I don't go into sectoral analysis typically, but I think we can say that this new administration in the US will be much more focused on climate change, and on green and clean energy and that probably boosts assets in these sectors.

HP: Thank you Christian, no doubt that’s given the listeners some thoughts about how to position their portfolios. I want to spend a little bit of time going from the new perhaps back to the old. So we come towards the end of the Trump Presidency I want to see from an economic perspective, how will his time in the Oval Office be viewed?

CK: It will probably be viewed greatly differently from different groups, but now if we try to make a rational economic analysis I think we can say two things. One, the economy that President Trump inherited in 2016 was already on an improving path and that was globally thanks, to a large extent, thanks to China's fresh credit impulse.

And what he did then is he layered on top of this improving global sentiment US corporate tax cuts and a lot of deregulation, and that truly boosted US sentiment, it boosted US equity markets and that's really something that stayed throughout his presidency.

Then the second legacy if you want is the trade war that only started in early 2018 where he created very large uncertainty with regard to not only trade with China but really global trade relationships. And that started of course to affect equity markets, certain sectors as there's a lot of uncertainty instilled with regard to where global trade was going.

Now one has to be fair that it has led to reassessment of relationships with regard to China which unlikely will change even under a new presidency. So if we look back Trump stood not alone in this, even Europe has changed its attitude towards China, but that is I think a second legacy.

And maybe to end on a positive note, I think the Trump administration can claim that they did bring unemployment down to very long time lows, 3.5% before the COVID crisis hit, and with increasing labour force participation, in particular for minority groups.

So you know, a lot of people did benefit from this policy in terms of getting into jobs and earning living wages. That is, I think one part of his legacy is that people who are in favour would emphasise.

HP: Thanks for your thoughts on the Trump Presidency Christian. Let's finish off if I can with perhaps a broader question thinking about what the outlook is for 2021 for the global economy. Where do you see strength and where do you see weaknesses as you look forward to next year?

CK: I think the outlook has to be very much focused on the pandemic and the control of it and it is about whether and when we can return to normalcy and these sporadic disruptions that we've seen and that have characterised 2020 will end. This will have a lot to do with whether we will find vaccines, whether they can be distributed, and whether by let's say the middle of next year or so we have significant shares of the relevant economies in a way vaccinated and can move on to, you know, activity as it used to be.

I think this is very crucial and much more important than any temporary relief packages. From that perspective we are relatively hopeful, we think there is some positive news underway with regard to vaccines.

We are not naive with regard to the difficulty of distributing it but we highlight that as I said by middle of next year or so we should be in a position whereby we hopefully return to normalcy in many areas.

And we would highlight that we have very large private savings accumulated over the past few quarters in a situation of lockdowns and of great fear in the population and these could be put to work, so to say, they could be reduced and as policies remain very accommodative at the same time that really could create a quite a boost once people see the end of the or the light at the end of the tunnel better, and see that normalcy is coming back.

HP: Well thank you Christian for your insights today both on the US election and the outlook for 2021. As always your analysis is greatly appreciated.

So beyond the US elections, it’s worth of course continuing to focus on the underlying fundamentals and we got some key figures during the course of last week that give us a guide to the economic outlook. And you can argue sentiment was boosted also by supportive central banks and the positive economic data releases that we saw.

In the UK the resurgent virus, the second national lockdown which started on Thursday and is due to last for a month, the lack of a Brexit deal, and lacklustre inflation expectations have all been putting pressure on the Monetary Policy Committee, particularly as the UK faces up to a double digit, double-dip recession followed by a softer recovery in 2021.

A quick look at the Bank of England’s new forecasts. They say UK GDP will fall by 11% during the course of this year, they are now forecasting a 2% contraction in the fourth quarter. They expect growth to rise in 2021, they’ve pencilled in growth of 7.25%, which I think in part reflects the sharper contraction during the course of this year.

Unemployment is now projected to peak at 7.75% in the second quarter. Inflation they believe will continue to undershoot the target level and they said that GDP will not be back to pre-pandemic levels till early 2022.

The MPC as we know, has already cut rates to a record low of 0.1%, they have instigated this unprecedented bond buying programme. On Thursday they ramped that up - government bond purchases will increase by an extra 150 billion pounds.

Those will start in January. Monetary support was also accompanied by additional fiscal measures. I think if the UK's growth profile continues to deteriorate we can expect the Bank rate to be cut to zero, lower capital requirements for the banks to be introduced, a cut in the term deposit rate in an effort to further boost lending to small and medium sized companies. Negative interest rates are certainly still possible but to us still look unlikely given the broad range of unintended consequences.

On the data front the big number of the week of course was on Friday non-farm payrolls - the US employment report. We watch the labour market figures closely as it directly filters through to private consumption levels, the primary driver of the US economy.

The labour market recovery unexpectedly accelerated in October and September's gain was also upwardly revised. In terms of those headline figures, while the US economy created 638,000 jobs last month - better than the consensus, the market was looking for a figure closer to 580,000.

The unemployment rate fell to 6.9% from 7.9%, a far bigger drop than was anticipated. In terms of our forecast where we expect the recovery in the labour market to continue, the US unemployment rate 6.5% at the end of this year, 5% by the time that we finish 2021.

From China the PMI surveys provided further evidence of that V shaped recovery playing out. Manufacturing PMI rose to 53.6 - China's manufacturing activity expanded for a sixth straight quarter in October and up to its highest level since January 2011. The service sector also gained with hiring picking up to its highest level in a year.

Looking at the week ahead, well I think investors will get a chance to digest recent events. We’re expecting a quieter week in comparison to last week, limited data releases. We should get confirmation of the rebound in activity in the third quarter with GDP figures coming through from the eurozone and from the UK, although of course recent virus containment measures suggest growth will be negative once again in the fourth quarter.

Watch out for UK unemployment figures, although the extension to the furlough scheme to March 2021 should help to keep UK employment rate from surging dramatically until then, though we still think UK unemployment will top 8% by the time that we get to the second quarter of next year.

And with that I'd like to thank you once again for joining us. We hope that you found this podcast interesting, informative, and giving you a guide as to how the US election can impact your investment decisions. We will be back of course next week with our latest instalment but for now may I wish you every success for the trading week ahead.