The four weeks since our last commentary have witnessed some dramatic changes in the macro backdrop to asset markets, with a much more positive tone.
The election of Joe Biden, albeit still contested by the incumbent, brings the hope of some calm in international relations and an end to megaphone (Twitter) government (if one can call it that). However, the likely retention of a Republican majority in the Senate should serve to act as a brake on any of the wilder left wing elements of the Democratic Party. President Trump’s actions are unworthy of the office, his failure to win approval from the Senate for his nominee to the Federal Reserve, Judy Shelton, might, hopefully, be a sign that his support is drifting away.
Naturally, the promising vaccine results announced over the past couple of weeks have had a major impact on equity markets. The S&P 500 has risen 5%, but there is a change in the tone of sector leadership away from big tech and pharma and back to the more cyclical areas, the NASDAQ is only up 3%. For the first time this year, UK markets lead the pack with a rise in excess of 8%, closely followed by the European markets, both benefitting from the switch back into ‘value’.
Bond markets have reacted with a further increase in 10-year rates, last month’s increase having correctly pointed the way ahead and credit spreads have regained their post-COVID-19 tights. The price of oil has picked-up, but without a great deal of enthusiasm, copper prices have improved (another lead indicator), while gold has drifted as some of the uncertain fog clears.
While back in the UK, we are still missing Brexit trade deal ‘deadlines’. We retain the view that the most likely outcome is a last-minute fudge. We do not think that leaving the EU trading bloc is sensible and is most likely to lead to lower growth for the UK over the next few years. Whatever one’s view of the European Union, as a 27-member trading bloc, it is a commercial superpower, rivalled only by the US. It is particularly galling to see the Asia-Pacific trade deal signed over last weekend (covering fifteen nations including China, Japan and South Korea) just as we leave the EU.
A Brexit without a deal of some sort will hurt the UK more than the EU, even with a deal we would expect UK growth to be slower than it would have been. At this stage, as deadlines slip by on a weekly basis, we hold to the view that a fudge is the most likely outcome though the chances of no-deal remain high. Hopefully, the recent personnel changes in 10 Downing Street have improved the prospect of a deal.