The Week Ahead - All I Want For Christmas

All I want for Christmas

The rapid recovery from the worst recession in modern history has lost some steam as new waves of Covid-19 infections build in Europe and the US. Some fade in the pace of gains was natural – it was never likely that the huge spike in third-quarter growth would be sustained. For months epidemiologists have warned that virus spread would accelerate as colder temperatures drive people indoors.

That is happening now. Covid-19 deaths in Europe and the US have surged above the peaks witnessed in March and April. And while we are optimistic about vaccines, widespread distribution may not happen quickly enough to prevent mortalities from accelerating into at least January – depending on the country.

How is this different from recent months? During the summer, most countries were able to manage virus spread while loosening restrictions. But the current Covid-19 wave is big: it is large enough to stress hospital systems. With intensive-care bed capacity projected to fall short of what’s needed in parts of Europe and the US, some governments, businesses and consumers need to temporarily adjust. The economic impact is already showing in high-frequency US data. (See our Chart of the Week).

Importantly, we think it is very unlikely global growth could collapse like in March and April. We know more about the virus today – how to live with it and treat it. Covid-infected economies are still expanding – just not as fast as before. However, behavioural adjustments combined with government restrictions may mean an additional interim loss of economic momentum.

From an investment standpoint, we recommend maintaining a medium-term strategic focus. Covid-19 may grab headlines this holiday season, but we think the economic outlook should brighten as we move deeper into 2021. In fact, while a Covid-19 Christmas is tragic from a human standpoint, it may provide impetus for additional government stimulus. And looking into the new year, a potent mix of stimulus, vaccines and pent-up demand could help lift investor spirits.

The Week Ahead

We are coming into one of the last big data weeks of 2020. The calendar is hot, with major releases planned almost every day.

For Asia-watchers, Tuesday will be important: Chinese retail sales and fixed investment for November are expected to show continued acceleration in the world’s fastest-recovering major economy. For Japan, key reports include 4Q20 Tankan manufacturing confidence (Monday), November exports (Tuesday) and November inflation (Friday). The Bank of Japan will likely maintain an easy monetary stance when it meets on Friday.

In Europe, Brexit negotiations are expected to proceed amid a slowdown in UK manufacturing and services PMI data (Wednesday). German investors will be keen to know whether rising virus cases and renewed government restrictions weighed on December manufacturing (Wednesday) and Ifo business confidence (Friday).

The biggest batch of economic reports will come from the US. In general, investors anticipate slowing across a variety of indicators, including industrial production (Tuesday), retail sales and homebuilder confidence (Wednesday), building permits (Thursday) and leading indicators (Friday). Policymakers at the Federal Reserve may note these developments – and the need for more fiscal stimulus – when they meet on Wednesday. While politicians in Congress agree that more economic relief is needed, the timing and size of a package remains subject to brinkmanship.

Talking technicals

Pessimism has flipped into tactically overbought conditions following last month’s epic rally, the best for the S&P 500 since 1928. As a result, equities could be due for a short-term breather. We are watching the VIX Volatility Index – a measure of the cost of protection from market sell-offs – for signs of complacency. The index fell from +40 in October to around 20 currently, and a decline into the 15-20 range could signal vulnerability.

Looking at thematic positioning, our long-held call for economic and market reflation remains intact. Government bond yields continue to drive higher and equities are rotating towards cyclical and value sectors. We think these trends could build in 2021, suggesting potential challenges for long-duration assets and shifting sector-level stock performance.

Be safe and enjoy the holidays,

Greg

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