#Articles — 15.12.2020

It's all a question of trust

Xavier Timmermans Senior Investment Strategist, PRB

The stock markets took a breather after 5 weeks of gains.

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For the week as a whole the StoxxEurope 600 shed 1.0% and the S&P500 0.7%. In the US, the recovery plan is overdue in a context of the worsening pandemic there, while in Europe, the extension of Brexit negotiations has sparked concerns.


Will the hopes raised by the rollout of vaccines and the combined efforts of central banks and governments still manage to maintain business and consumer confidence?   


The pandemic

Vaccines have started to be administered in Britain and should start today (Monday) in Canada and the United States, with authorisations just granted.  This good news has enabled US equities to stand firm in a context of rising contamination numbers and increasingly restrictive health measures implemented almost everywhere in the country. Germany has also decided to put in place more drastic health restrictions.


While everything seems to be going well for the Pfizer-BioNTech and Moderna vaccines, this is not the case for those of Sanofi and GSK, whose tests have proved unsatisfactory.


ECB: even longer and longer

As it had hinted at its previous meeting, the ECB increased and extended its unconventional monetary policy. Bond repurchases under the “Pandemic Emergency Purchase Program”  were increased from EUR 500 billion to EUR 1,850 billion and were extended to March 2022. Banks will be able to continue borrowing at -1% in the framework of, and under the terms of the Targeted Longer-Term Refinancing Operations (TLTROs) until June 2022.


There were no real surprises, which disappointed some market participants.  Ten-year yields on German government bonds remained almost unchanged at -0.63%. Southern European countries are the main beneficiaries of these massive bond buybacks. Portugal has joined the list of countries whose 10-year debt generates negative yield. Spain should follow suit while Italy pays only 0.52% despite the enormous size of its debt.


What is certain is that financial conditions will therefore remain extremely favourable for individual and corporate borrowers.


Mixed economic data

In the US, new jobless claims rose more than expected. But according to the University of Michigan monthly survey, contrary to expectations, consumer confidence improved in December.


German industrial production rose more than expected in October and the ZEW survey of some 350 industrial investors and analysts shows a pick-up in the business climate.  


Brexit: negotiations will continue

Last Sunday, the European Commission's President Ursula von der Leyen and British Prime Minister Boris Johnson decided to allow more time to pursue talks on Brexit trade relations.  There remain some key issues to resolve: access to British fishing waters, terms for avoiding unfair competition and disputes.  But perhaps we should consider it encouraging that there has been no breakdown in talks.


As a precaution, the European Commission decreed some emergency measures to maintain in the event of a 'no deal':  i) air traffic and road transport between the UK and the EU for six months and ii) reciprocal access to Britain’s fishing waters for one year.


There was some good news about the EUR 750 billion stimulus package: Poland and Hungary lifted their veto.


The week ahead

All eyes will be on the United States. The Fed's monetary policy committee meets on Wednesday. With regards to the relief package so badly needed by the economy, there are only a few days left as the congressional recess starts at the end of the week. Will the Fed do more if the political gridlock persists?


A lot of good news has already been priced in.  Unfortunately, given the new health measures, disappointing economic data are to be expected. How will the markets react?  Will they grin and bear it in the run-up to 2021?


It's all a question of trust. US consumer confidence has improved despite the resurgence of the pandemic. As far as business confidence is concerned, we will have an indication of this with this week’s preliminary PMI (Purchasing Managers' Index) for December.