Rabo: It’s Darkest Before The Dawn
Fri, 12/18/2020 – 08:59
By Piotr Matys of Rabobank
Global stocks have lost their bullish momentum after Reuters reported that the US will blacklist dozens of Chinese firms, including the country’s top chipmaker SMIC. It will be yet another step by President Trump to cement his legacy of being tough on China before he leaves office in January.
Political bickering over a spending package that would be a bridge for US households and companies through a harsh winter continues in Congress. Perhaps yesterday’s news of a sharp rise in weekly jobless claims to the highest level in three months at 885,000 will provide US policymakers with a strong incentive to push the stimulus package through in the next few days. The labour market has been hit by rapidly rising coronavirus cases forcing many states to impose tougher restrictions. A significantly larger than expected fall in retail sales for November (-1.1% m/m) was a warning signal that consumer spending is losing momentum. Without doubt, fiscal stimulus is required to support the economy in the coming months.
Many European economies will also need a fresh dose of stimulus from governments to reduce the negative impact of restrictions imposed to regain control over the second outbreak of the pandemic. Virologists are seriously concerned that the upcoming festive period will be followed by an even bigger surge in infections across the continent at the beginning of 2021. Poland’s Health Minister Niedzielski warned that the country faces “tough days and weeks” before the vaccine is widely redistributed. Similar comments could have been made by many other European health ministers. The Polish government will impose a “national quarantine” from December 28 to January 17 to prevent the third wave from overwhelming the healthcare system. Hotels, ski-slops and shopping centres will be closed on the top of already existing restrictions (schools, restaurants and sports centres have been shut for a few weeks). Also, a curfew will be imposed on New Year’s Eve to restrict movement of Poles (many of them still remember similar drastic steps being used by the communist party during the martial law in early 80s making the curfew a controversial, but necessary step).
The phrase that it’s darkest before the dawn certainly applies to the coronavirus pandemic. While vaccines are already available and will be globally distributed in the coming months, new cases may surge following the festive season. The third wave could be even bigger, as Poland’s health minister warned and his concerns are most likely shared by his peers.
The markets do not seem to be seriously concerned, though. For them an efficient antidote has been available since around March when the Fed and other major central banks used all tools from their toolbox to inject as much liquidity as possible.
GBP has edged down from yesterday’s levels as the nail-biting finish to the EU/UK trade talks goes to the wire. A call between EC President von der Leyen and PM Johnson yesterday evening resulted with both sides welcoming “substantial progress on many issues”. However, this could not hide the fact that various differences remain. The UK warned that EU level spending should not be exempt from state-aid restrictions, this includes its EUR 750bln Covid-19 Recovery Fund. Fisheries remain the major sticking point with the PM re-stating that the UK must have control of its own waters.
Over the past few weeks, sentiment on Brexit has been swinging back and forth between unsustainable optimism, as progress on key issues is always made through crises, and unjustified pessimism, as the broader set of fundamentals have always pointed towards a deal. Even though time is running ridiculously short, there’s no reason why this shouldn’t be true for fisheries as well, our Brexit watcher Stefan Koopman claims. The proverbial ‘fish can’ has been kicked down the road time and again, as it is one of the few sources of leverage that the UK really has in these talks, and it is only logical that the negotiators try to squeeze as much out of it as they can. So far, their madman strategies have worked out reasonably well, after all. The UK government also believes that time is on their side, so even as the European Parliament stated that this Sunday will be the last possible moment for a deal if negotiators want it to be ratified before year-end, please keep in mind what happened to all the other deadlines. Let’s just hope they’ll get it done this time around.
In the midst of the confusion the Japanese Times is reporting that Nissan has opted to ship a new electric vehicle from Japan to Europe rather than manufacture it in its UK factory which, the paper states, is facing an existential risk due to Brexit. Better news came this morning from the stronger than expected reading for the UK December GfK consumer confidence index. This rose by the most in 8 years on the back of positive vaccine news. November retail sales were also better than expected at -3.8% m/m, though the series was hit by England’s lockdown last month. News that the UK furlough will be extended a month to April will be supportive. The Chancellor also pledged further support for UK businesses with an extension to his emergency loan schemes.
The Bank of England MPC voted unanimously to maintain Bank Rate at 0.10% and to keep its asset purchase targets unchanged. The pace of these purchases remains at its current rate of GBP 4.4bn a week. There were no specific references to negative interest rates. Instead, the MPC emphasized once more that it stands ready to increase the pace of bond purchases if necessary. The MPC noted that the outlook remains ‘unusually uncertain’. This is an understatement. However, the planned rollout of effective vaccines would be expected to have a positive impact on activity and inflation and is seen to reduce downside risks. The TFSME was extended by six months to 31 October 2021. Full post meeting analysis by Stefan is available here.
The BoJ announced no change to rates or its yield curve control target this morning. However, it did pledge to extend its aid for firms hit by the pandemic and pledged to examine more effective ways to achieve its 2% inflation target. The Tokyo region is currently suffering another spike of covid-19 cases which it putting pressure on its hospitals.