Brexit talks head to the wire

• Brexit talks resumed on Sunday after PM Boris Johnson and European Commission President Ursula von der Leyen spoke on Saturday.  Talks had broken down at the end of last week after the UK accused the EU of making new demands and France threatened to veto a deal that wasn’t in its interests. Fishing rights, “the level playing field” (ie government subsidies, competition and environmental regulations) and the governance of any agreement remain the key sticking points.  A deal would need to be reached by Thursday’s EU summit, which would allow time for all governments to ratify the agreement before 31 December. 
• US jobs data disappointed in November.  Non-farm payrolls rose 245k last month, well below expectations for a 460k increase.  The October reading was also revised lower to 610k from 638k.  The rise in coronavirus cases and renewed restrictions on activity in some parts of the country weighed on the November employment figures, particularly in the services sector. This is likely to deteriorate further in the December jobs report as coronavirus cases continued to rise and further restrictions have been imposed in recent weeks. The unemployment rate fell 0.2pp to 6.7% as the labour force participation rate declined from October to 61.5%.
• There is growing support for a bipartisan fiscal stimulus worth USD 908bn in the US, although the current proposal does not include another round of direct cheques to households. It makes provision for USD 300/week in enhanced unemployment benefits, more support for small businesses and extra funds for state and local governments.  Congress also needs to pass government funding bills to avert a government shutdown from Friday 11 December.
• China’s exports grew 21.1% y/y in USD terms in November, much faster than the consensus forecast of 12.0% y/y while import growth was softer than expected at 4.5% y/y.  The data suggests that global demand remained strong in November despite the reimposition of some restrictions in major economies on the back of higher coronavirus cases.
• Saudi Arabia’s PMI rose to 54.7 in November from 51.0 in October and was the highest reading since January 2020.  Output and new work rose at a faster rate and employment was slightly above the neutral 50-reading for the first time since the pandemic.  Encouragingly, panelists were more optimistic about their future output than they have been since the start of the year, as the prospect of an effective vaccine and further easing of restrictions have improved the outlook. 
• Saudi Arabia’s private sector credit growth accelerated to 15.2% y/y in October, the fastest annual growth since October 2014. Money supply growth also accelerated slightly to 10.8% y/y from 10.6% y/y in September.  The central bank’s net foreign assets declined by USD1bn to USD 441.9bn at the end of October. The value of point of sale transactions rose 1.3% m/m and 33.9% y/y.
• Egypt’s PMI slipped to 50.9 in November from 51.4 in October as output and new orders increased at a slower rate.  Firms were increasingly concerned about the second wave of Covid19 infections in Europe weighing on the global recovery, and Egypt’s exports.

Fixed Income

• Treasury markets continued to sink last week as poor jobs data from the US for November reinforced the need for fiscal support measures while risk assets continued to power ahead. Yields on long-dated USTs gained with the 10yr UST closing at 0.9659%, a near 13bps gain over the course of the week. However, with short-run yields staying reasonably steady—the 2yr yield closed at 0.1507%, less than 1bp of movement w/w—the curve steepened considerably to more than 80bps on the 2s10s.
• Emerging market bonds ended the week higher, gaining 0.4% w/w to extend their rally to five weeks in a row. Local UAE dollar denominated bonds gained, albeit by 0.2%, to extend their rally to five consecutive weeks.

FX

• Movement amongst major currencies was mixed last week. The DXY index, a measure of the dollar against a basket of major currencies, hit highs of 92.051 early on but reversed this aggressively to lows of 90.476, its weakest point since 2018, before ending at 90.805. A cocktail of bearish factors continue to weigh on the USD including US fiscal stimulus, vaccine hopes and dovish Fed expectations. USDJPY fluctuated between 104.75 - 103.67 before closing the week at 104.19 after a slight recovery on Friday, marking a slight increase from the week prior's closing price. 
• The EUR has surged off the back of USD weakness, advancing to highs of 1.2178, a level not seen since 2018, before closing at 1.2122. Despite ever-growing Covid-19 cases, vaccines news and the election of Joe Biden has brightened market sentiment in the region. Sterling recorded wide intraday movement, trading from lows of 1.3288 to highs of 1.3539 before settling at 1.3441. Brexit headlines continue to dominate price movement for the GBP. The AUD ended the week positively at 0.7426 whilst the NZD reversed from highs of 0.7104 to close at 0.7042. 

Equities

• Benchmark equity indices ended the week on a high with the Dow and S&P 500 gaining more than 0.8% on Friday while European markets were all strongly in positive territory. The disappointing US jobs report for November seems to have convinced markets that additional support measures will be coming even as the labour force shrank last month and Covid-19 still haunts the global economy.

Commodities

• Oil prices extended their gains last week on news that OPEC+ would only deliver a small increase in production from the start of January, rather than unload a substantial amount of oil that the market may not have been prepared to absorb. Brent futures rallied more than 7% to settle at USD 49.25/b, within sight of USD 50/b, while WTI was up more than 8% to close at USD 46.26/b.
• Time spreads have also improved considerably with longer dated spreads (1-12 months) in the Brent market nearing in on a backwardation of USD 1/b compared with a contango of almost USD 3/b a month ago. With only a small increase planned for January 2021, OPEC+ output levels will keep the market in consistent draws for the first months of the year, provided compliance is strong.

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