Week up front: COVID and pantomime game

Macro
Christopher Dembik

Summary:  With the European economy shrinking again on the back of the new lockdown, as shown by today's PMI, the market is looking beyond COVID-19, hoping for a swift economic recovery in 2021 when the vaccination programme will start. Today, we focus on vaccine news, risks related to the surge in global debt and the endless talks about U.S. fiscal stimulus.


What to watch

Today, investors are looking beyond COVID-19, hoping for a swift recovery in 2021, which should continue to fuel rotation into cyclicals, value stocks. There is a bunch of macroeconomic data both from the United States and the euro area all week, with a special focus on tomorrow’s German Ifo business climate index and the ECB and FOMC meeting minutes that might provide key insights regarding the evolution of monetary policy in the near future. The highlight of this week regarding COVID-19 and restrictions will be Macron’s speech tomorrow that should offer clarity on lockdown end. At the moment, it seems that France’s strategy will consist in reopening the economy in three phases, the first one starting from December 1 with the reopening of retail stores.

Key data releases & events

Tuesday: German GDP (QoQ, Q3), German Ifo business climate index (Nov.), Macron’s televised appearance to offer clarity on lockdown end.

Wednesday: US GDP (QoQ, Q3), US initial jobless claims, FOMC meeting minutes, Michigan consumer sentiment (Nov.).

Thursday: Thanksgiving day, ECB publishes account of monetary policy meeting, GfK German consumer climate (Dec.).

Friday: French GDP (QoQ, Q3), French consumer spending (Oct.).

1. The second wave is hitting the U.S.: new record at 12 million cases

The pandemic continues to expand, with the number of U.S. cases toping at 12 million and the total number of death reaching 255,567. Over the past few days, a number of U.S. states have enacted new restrictions to cope with the second wave of the virus. In these circumstances, we see a high risk that U.S. GDP growth will be negative in Q4 this year and perhaps in Q1 next year as restrictions will likely last longer than most expect in order to avoid a third lockdown. In Europe, there are further indications that Western European countries have passed peak of the second wave. Confirmed case growth has begun to decrease in France, Spain and the United Kingdom, and it has started to flatten in Germany and Italy. In France, President Emmanuel Macron will deliver a televised speech tomorrow evening at 19:00 GMT to clarify the lockdown rules. According to details revealed by the media over the weekend, the reopening of the economy will be much slower than after the first lockdown and will consist in three phases, the first one starting on December 1 with the reopening of retail stores. A very high degree of restrictions will remain and citizens will be asked not to leave home unless for very specific reasons (such as medical appointment) and will be required to carry an exemption certificate.

2. Virus Vaccine: the latest news

 There have been a lot of developments on the vaccine front over the past few days. AstraZeneca has confirmed earlier today that its vaccine, AZD1222, met primary efficacy endpoint in preventing COVID-19. Based on clinical trials that took place in the United Kingdom and in Brazil, the vaccine showed an efficacity of 90% when given first as a half dose then followed by a full dose at least one month later. It is also expected that the FDA’s panel will meet on December 10 to evaluate Pfizer’s emergency use authorization request. If approved, the United States could be the first developed country to start nationwide vaccination programme in late December. The timeline is a bit different for the European Union, with a lag of two to three weeks. The European Commission hopes the European Medicines Agency will give conditional marketing authorization to Pfizer and Moderna’s vaccines by the end of December, which could allow most European countries, notably France, Germany and Spain to start vaccination in early January next year. There is still uncertainty concerning vaccine skepticism in some countries, notably France where only 54% of the population is willing to get vaccinated. But even with such a low threshold of vaccination, experts considers it is not an obstacle to achieve herd immunity.

3. Global debt is forecasted at 365% of GDP this year

In its latest report, the Institute of International Finance forecasts that global debt will reach $277tr at the end of this year, or 365% of GDP, versus 322% of GDP at the end of 2019. Developed countries are at the origin of nearly half of the increase in global debt. This strong jump results from the combined effect of indebtedness and fall in GDP due to the global lockdown and restriction measures. This situation is not as worrying as most may believe. All indicates that we are not heading towards a new sovereign debt crisis in developed countries. What has changed with the pandemic is that central banks, all around the world, have stepped in in the market to make sure that governments can borrow money as much as needed and for as long as needed to cope with the scars of the crisis. As a result, since March, the ECB has been the first buyer of European public debt, purchasing 70% of newly issued bonds. This is more or less the same situation everywhere else in the developed world with the Fed purchasing 57% of newly issued T-bonds and the Bank of Japan purchasing about 75% of newly issued government bonds. We have entered into a new economic and monetary paradigm where DM central banks are de facto market markets in the sovereign debt market. Add to this the new cooperation between central banks and governments to cope with global issues, that is likely to continue and deepen in the post-COVID area, there are strong arguments to believe that the level of public debt in the developed world will never really become an issue.

4. United States: another pantomime game

Brexit is not in the spotlight this week, but there is another pantomime game to focus on: the endless talks about U.S. fiscal stimulus. McConnell and Pelosi have confirmed that fiscal talks are back on, but with nothing new in sight and no one being ready to make concession, it is clear that talks are doomed to fail. We still expect that an agreement on another fiscal stimulus package is unlikely in the coming weeks, as tensions regarding the presidential transition remain and as the risk of shutdown is looming (December 11). The best case scenario is to finalize a fiscal stimulus in January ahead of Joe Biden’s inauguration. With the U.S. economy being currently hit by the second wave, and the economy showing signs of weakness, as underlined by last week’s rising initial jobless claims, pressure is mounting on the Federal Reserve to adopt a very dovish tone on December 16. However, at this stage, uncertainty prevails regarding the future of some emergency lending programs that U.S. Treasury Secretary Mnuchin wants to end. There is still the possibility to reinstate these programmes when the Biden administration will take over, but it means there would be a policy vacuum for two to three weeks in January which is highly risky from a market perspective.

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