With only two weeks left of 2020, Brexit negotiations remain extremely uncertain. Prime Minster Boris Johnson has again reiterated that a no-deal scenario was “very likely” unless the EU’s position changed “substantially.” Meanwhile, EU President, Von der Leyen said in a statement that both sides welcomed “substantial progress on many issues” but added that it would be “very challenging to bridge the big differences, in particular on fisheries.”
With the 31 December deadline fast approaching, the EU has set this Sunday as a deadline for talks, allowing time to ratify legislation when the transition period ends, whilst the UK Parliament is on standby for an emergency sitting before Christmas to consider the approval of a deal.
The Bank of England unsurprisingly left its benchmark interest rate on hold at 0.1%, while asset purchases were left unchanged. It also announced that it was ready to tolerate an inflation spike in the event of a trade deal not being reached.
Outside of the UK, major equity indexes recorded fresh all-time highs as fiscal-stimulus optimism, along with a brighter longer-term outlook driven by the rollout of vaccines, continues to support sentiment. After weeks of stalled negotiations, it appears that Congress in the U.S. are closing in on an agreement on a relief bill worth $900 billion.
The U.S. Federal Reserve kept its key interest rate unchanged at their final meeting of the year. It also pledged to keep interest rates lower for longer and to continue buying government-backed debt until its goals of full employment and stable inflation are met. The Fed has been buying about $120 billion in government-backed debt each month to stimulate growth.
The first BioNTech-Pfizer Covid-19 vaccine shots were administered by U.S. hospitals on Monday. Meanwhile, Moderna’s vaccine was deemed safe by U.S. regulators on Thursday, clearing the way for a second coronavirus vaccine to quickly gain emergency authorisation. Agencies in Europe will also review the BioNTech-Pfizer vaccine earlier than planned amid growing pressure to approve it.
Japan lowered its 2020 GDP forecast to a contraction of 5% (previously -4.5%) but increased its 2021 expectation. The Bank of Japan also announced a six-month extension of its special program aimed at easing corporate financing pressures. The yield target on the 10-year Japanese government bond was set at around 0.00% while the short-term interest rate was set to -0.10%.
With the exception of the UK’s FTSE 100 Index (-0.27%), global equity markets were stronger this week. In the U.S., the Dow Jones (+0.44%), S&P 500 (+1.25%) and Nasdaq (+3.05%) were all positive. Similarly, Europe’s Stoxx 50 (+1.72%) along with Japan’s Nikkei 225 Index (+0.42%) and China’s Shanghai Composite Index (+1.43%) all ended the week in the green.
Market Moves of the Week
President Ramaphosa announced a raft of new restrictions to limit the virus spread over the festive season. These new measures come after SA enters a second wave of Covid-19 infections. Ramaphosa declared the Garden Route area as well as the Sarah Baartman District Municipality in the Eastern Cape as new Covid-19 hotspots, where tighter restrictions will apply. Nationally, the evening curfew has been brought forward to 11pm to 4am with indoor gatherings limited to 100 people and outside gatherings to 250 people.
The JSE All Share Index ended the week up +0.63%, led higher by the financial (+5.78%) and resource (+1.18%) sectors. Along with other emerging market currencies, the rand rallied this week as risk appetite for emerging markets increased. By Friday close, the rand was trading at R14.53 to the U.S. Dollar. Unsurprisingly, this negatively impacted the industrial sector (-1.88%), ending the week as the outlier.
Chart of the Week
With less than two weeks to the end of the Brexit transition phase (ending 31 Dec 2020), the risk of a “no deal” remains a possibility. According to Goldman Sachs Global Investment Research, the outcome of a “no deal” would hit UK growth the hardest in 1H21. Goldman Sachs further estimates that should the U.K. be forced to resort to World Trade Organisation (WTO) rules due to a no deal Brexit, this would reduce UK real GDP by 2 percent relative to a Fair-Trade Agreement (FTA) between the UK and the EU.
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