UK economy contracts -9.9% in 2020

• The UK recorded a real GDP contraction of -9.9% in 2020, the largest since 1709, as the economy grappled with the coronavirus pandemic crisis and the associated lockdowns and restrictions on movement and activity. Nevertheless, the fourth quarter exceeded expectations, recording q/q growth of 1.0%. This was greater than consensus projections of 0.5% and means the UK avoided a double dip recession last year. Looking ahead, the tighter and longer restrictions in place currently mean that there will almost certainly be a further contraction in the first quarter, but the outlook thereafter is somewhat brighter given the UK’s effective vaccination programme and hopes for a gradual normalisation. Bank of England chief economist, Andy Haldane, over the weekend described the UK as a ‘coiled spring’ waiting to burst, implying that growth will see a remarkable uptick later in the year as households are able to spend the GBP 250bn in savings amassed through successive lockdowns.
• Japan also surprised to the upside in the fourth quarter, as q/q growth came in at 3.0%, compared to projections of 2.4%. On an annualised basis, growth was 12.7% q/q, compared to consensus expectations of 10.1%. For the year as a whole, GDP contracted by -4.8%, but this also compared favourably to the IMF’s October projection of -5.3%. Exports in particular fared well in the fourth quarter.
• US Treasury Secretary Janet Yellen met with G7 finance ministers and central bankers over the weekend. In comments published by her office, the former chair of the US Federal Reserve emphasised that ‘the time to go big is now’, urging greater fiscal support of the like currently being pushed through in the US by the new Biden administration. She also signalled a return to the multilateralism that was largely rejected by the preceding administration, saying that the US ‘places a high priority on deepening our international engagement and strengthening our alliances.’ Reports by other attendees of the virtual meeting attested that she signalled a commitment to tackling the climate emergency, support for poorer countries around the world, and on discussions over the taxation of the major digital firms. This has also become an issue in the US, as the State of Maryland voted on Friday to tax the revenue from advertisements on digital platforms, making it the first state to do so.
• Jobs data out of the US on Thursday underscored the ongoing need for government support, as initial jobless claims came in at 793,000 in the week ending February 6. This exceeded projections of 760,000, but was down from the upwardly revised 812,000 the previous week (the figure previously released was 779,000). Prior to the pandemic, the initial jobless claims hovered around the 220,000 mark each week. In comments on Wednesday, Federal Reserve Chair Jerome Powell said that getting the US back to full employment would take not only ongoing supportive monetary policy from the Fed, but a ‘society-wide commitment, with contributions from across government and the private sector.’
• The IMF completed Article IV missions to Oman and Bahrain.  On Bahrain, the IMF estimates that the economy contracted -5.4% last year, with the budget deficit widening to -12.8% of GDP against our forecasts of -5.0% and -11.2% respectively.  The Fund estimates Bahrain’s stock of public debt rose to 133% of GDP in 2020.  The IMF notes that while the near-term priority should remain public health requirements and targeted fiscal support, it stressed the need for ambitious fiscal adjustment over the medium term to reduce imbalances and put debt on a downward path.
• On Oman, the IMF revised up its growth estimate for 2020 to -6.4% from -10% previously (Emirates NBD: -5.1%).  The IMF estimates the budget deficit widened to -17.3% of GDP last year while government debt rose to 81% of GDP. The IMF expects a modest recovery this year but noted that uncertainty remained high, and that the government’s plan to reduce the budget deficit over the medium term is welcome.

Today’s Economic Data and Events

• US markets are closed on Monday for the Presidents’ Day federal holiday
• Eurozone industrial production m/m: 14:00 forecast -0.8%
• Canada manufacturing sales m/m: 17.30 forecast 0.6%

Fixed Income

• Benchmark bond markets continued to wilt in the face of strong risk-on moves last week with equities, commodities, high-yield bonds and cryptocurrencies all recording sizeable gains. US treasuries sold off with a broad index falling by 0.15%. Yields on the 2yr remain anchored at their low levels of around 0.1%, strengthening their hold at that level following more dovish commentary from Fed chair Jerome Powell.
• Meanwhile yields on the 10yr UST closed out the week at 1.2082%, a 4bps move over the week although yields did dip as low at 1.11% following the soft January inflation print. The 2s10s spreads has now solidified at over 100bps while 10yr breakeven levels at 2.23% are at their highest levels since 2014.
• European bond markets were spared the sell-off with a broad European index also down by 0.15% with 10yr bund yield gaining almost 2bps over the week (closing at -0.429%) and gilt yields closing above 0.5% for the first time since March 2020.
• Central banks in focus this week are Bank Indonesia (market expectation for a 25bps cut) and Turkey where we anticipate the CBRT will hold.
• Moody’s lowered their sovereign rating on Sharjah to “Baa3” and place the ratings outlook on negative. The agency noted the “deterioration” in the emirate’s “fiscal strength” brought about by the Covid-19 pandemic.

FX

• The dollar sank for the first week in three last week with the DXY index falling by 0.6% to settle at 90.48. The bump in UST yields helped the greenback recover some ground on Friday albeit not enough to erase losses earlier in the week. Gains were widespread against the dollar with the Euro gaining 0.6% to settle the week at 1.2120 while USDJPY fell more than 0.4% to close out back below the 105 handle.
• GBP and AUD were the standout gainers over the week with sterling rallying 0.8% to settle at 1.3852 as the UK managed to avoid a double dip recession with q/q growth of 1% in Q4 2020. Meanwhile the AUD rallied more than 1% to close the week at 0.7761 despite lockdown conditions being reimposed in the state of Victoria.

Equities

• Global equity indices benefited from risk-on tone last week, with only Germany’s DAX (-0.5%) and South Korea’s KOSPI (-0.9%) closing lower over the period amongst the major benchmarks. Other Asian indices were the biggest gainers, with the Hang Seng (3.6%), the Shanghai Composite (3.9%) and the Nikkei (4.2%) moving significantly higher.
• In the US, hopes for the Biden stimulus package and an ensuant economic recovery saw all three major indices close at record highs after further gains on Friday. This left the NASDAQ as the biggest w/w winner, up 1.7%, followed by the S&P 500 (up 1.2% w/w) and the Dow Jones which gained 1.0%.
• Aside from Germany, the risk-on tone prevailed to a degree in Europe also, although problems with vaccination roll-outs continued to weigh on stocks and the gains were more muted than seen elsewhere in the world. The composite STOXX 600 closed up 1.1% w/w, while France’s CAC gained 0.8%. Italy’s FTSE MIB closed up 1.4% w/w, bolstered by positive movements on the political front.
• Even the gains in the pound, as sterling rose to a 33-month high against the dollar, were not sufficient to keep the FTSE 100 down as it closed up 1.6% w/w. That being said, the index is still a global laggard, up only 2.0% ytd compared to ytd gains of 4.8% in the S&P 500 and 9.4% in the NASDAQ, and it is still far below its pre-pandemic levels.
• Within the region the DFM lost -1.4% w/w, while the Tadawul closed 3.8% higher.

Commodities

• Oil prices recorded another strong week of gains with Brent futures closing up 5.2% at USD 62.43/b. WTI is closing in on USD 60/b, settling the week at USD 59.47/b, a gain of 4.6%. Forward structures also strengthened with Dec 21/22 spreads in WTI settling at USD 3.75/b, up 11% w/w, while the same spread for Brent futures closed the week at USD 3.16/b, a gain of slightly more than 12%.
• The IEA’s monthly report left its oil demand growth forecast largely unchanged although they did lower Q1 expectations to a decline of 110k b/d y/y. The agency is pointing to a decent pace of non-OPEC+ supply growth, particularly from Canada and Brazil, while they see US output stabilizing after 2020’s heavy decline.
• Exploration and production companies in the US added rigs for a 12th week in a row in the US, adding 7 rigs last week and taking the total up over 300 for the first time since May 2020. The improving forward structure in oil prices may help producers in the US lock in prices and allow for production to outpace projections for stability this year. 

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