US Stimulus Hopes and Brexit Brinkmanship
The end of the year is fast approaching, and pressure is growing on policymakers on both sides of the Atlantic to resolve key issues on stimulus and trade ahead of key year-end deadlines. In the US, with government existing support schemes set to end just after Christmas, this relates to the much-needed stimulus required to support millions of Americans who have been negatively impacted by the pandemic. In the UK, its the final efforts to agree a Brexit deal with the European Union before it officially leaves the trading arrangement at the end of the year. After a challenging year owing to the economic disruption caused by the pandemic, investors and economists will be hoping that the two issues are resolved smoothly in the hope of avoiding significant volatility in the few trading sessions left in the year.
Stimulus Negotiations Gather Pace
US stocks have been reactive over recent months due to the uncertain outlook for the US economy. With numerous stimulus relief packages expiring by the year end, investors have placed increasing focus on stimulus negotiations between Republicans and Democrats who have failed to agree on a stimulus package for the past five months. With US stocks sliding at the beginning of December due to the rejection of a bipartisan stimulus proposal, US equity markets gained this week as stimulus negotiations gained momentum. The proposed bill, valued at around $748 billion, is said to have separated the most contentious and partisan parts out, with the core focus being a cash injection directly into the economy.
A stimulus bill will be key to mitigating a worsening US economic outlook until a Covid-19 vaccine is frequently distributed. With Covid-19 cases reaching an all-time high in the US, alongside an incoming Senate recess between 21st December to 31st December, financial markets will be hoping for relative urgency from US policy makers in providing the needed relief to slowdown the worsening short-term outlook.
For more information on the state of the US economy and our US outlook, please see the attached Market Update document.
Brexit Negotiations Run Down to the Wire
Tensions ran high over the week as Boris Johnson attended a number of discussions with European Commission President Ursula von der Leyen, but despite Boris flying to Brussels in an attempt to reach a last-ditch deal, negotiations remain deadlocked. Following the meeting, Von der Leyen avoided putting a precise probability on the chances of a trade agreement, but said that there was a higher probability for no deal than deal. However, optimism returned when Sunday’s deadline was extended, with talks on key differences to continue over the week. The move showed willingness from both signs to reach a deal and boosted optimism that a compromise may still be on the cards. Even with some frosty interactions between Johnson and Von der Leyen earlier in the week, the narrative has improved somewhat since, with the two able to agree a joint statement following their most recent call.
The two sides have reportedly settled their differences on most of the major sticking points but are now heading for a final battle on fishing rights as trade talks reach a climax. Michael Barnier, the EU’s Chief Brexit negotiator, has given Boris Johnson an ultimatum on fishing, warning him that he will have to accept limits on access to the single market in return for greater control over fishing – something Boris says is unreasonable, and will not happen – or face no deal. The way things stand, it looks like negotiations will go down to the wire once again ahead of the hard December 31st deadline, with both sides staying strong to their hard-stance negotiation tactics.
With negotiations still ongoing between democrats and republicans, it is our view that we will see stimulus agreed in the US to soothe short term economic pain and prevent against longer lasting scarring in the US economy. Both sides agree that stimulus is urgently needed, and with a key deadline fast approaching, it looks likely that the reduced deal will be agreed to patch short term needs, while a larger, more contentious package continues to be debated.
On Brexit, it still remains our view that a deal will be agreed, however should the two sides fail to reach an agreement, it is likely that talks will continue in the new year to ascertain a new trading arrangement, even if trade is continued on WTO rules in the short term. We are expecting to see more volatility in UK assets as negotiations drag on, however rest assured that the portfolios are well positioned to navigate this added volatility, with high levels of diversification to reduce country-specific risk.
Don’t Worry, 2020 is Almost Over!
These are unprecedented times, and markets have been extremely volatile so far this year, however reflecting on the year so far, the changes made to the portfolio over the period have added significant value compared to market movements, and the portfolios have performed well. Looking ahead and into 2021, we remain optimistic that growth will gradually pick up with the controlling of virus cases, combined with the rollout of the vaccine and accommodative policy. Our portfolios have remained strong despite the short-term volatility and, although volatility will remain in the short-term, we see upside opportunities as we look to the medium and long-term. Moving into 2021, we see the outlook becoming clearer with less political uncertainty, and the portfolios are well positioned to benefit as economic conditions continue to improve.
Key Events We Are Watching This Week:
- Tuesday: GDP final readings for Q3 for the US and UK
- Wednesday: US consumer spending data for November
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Service Update over the Festive Period
As the festive period is just around the corner, this will be the last market commentary of the year, with the next commentary coming to you on the 6th January. The office will be closed for Christmas from 12:30pm on Christmas Eve, but we will be back open as normal in the period between Christmas and the New Year on the 29th to the 31st December.
Model Portfolios & Indices
Global stock markets continued to display high levels of volatility over the week as countries across the world battle with surging virus cases and political uncertainty. The portfolios gained over the week as markets rallied on positive vaccine developments and positive economic policy developments. Looking ahead, we are optimistic on the medium-term outlook from here, accepting further volatility in the near term, but confident in our positioning, with well diversified portfolios which have been designed to weather these challenging market conditions.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 1966, Dr Seuss’ “How the Grinch Stole Christmas” aired for the first time. The animated story was adapted into a feature length feature film in 2000 and remains a popular annual Christmas feature.
Wishing you a very Merry Christmas and a Happy New Year!
Jason & Gina