The week ahead: payrolls, oil and why central banks could see Santa come early
The November rally for global stocks came to an abrupt halt at the start of this week, the FTSE 100 fell 1.5%, and there were declines of a similar amount for French and Italian indices, while German and US indices also fell, although not by as much. Not even news that the Moderna vaccine will be rushed through for US and EU regulatory approval, which could mean that the vaccine could start being distributed in the coming weeks, could stem the decline in markets. So, are traders taking profit after a strong month for risk assets and setting the stage for further gains into the end of the year, or are there bigger problems on the horizon?
Prepping for central banks
Before we move into thoughts of Christmas cheer, there are some key events coming up in financial markets to digest first. This includes the ECB meeting on 10th December and the Federal Reserve meeting on 16th December. There is rising expectation that the second wave of coronavirus, and the ensuing economic disruption, along with delays to fiscal stimulus in the US and in the EU, will lead to both central banks extending their easing measures later in December. Looking at the Fed first, the path of least resistance for the Federal Reserve is to extend asset purchases. Although credit facilities will expire at the end of this year, the process for getting them extended is tricky since it requires the cooperation of the Trump administration, who may not be too inclined to extend the credit facilities so close to the end of President Trump’s term in office. Thus, QE is the easiest tool to use to boost the economy at a difficult time for the US. The best way for the Fed to do this is to extend the maturity of its $80bn per month Treasury purchases. This could put further downward pressure on long term US interest rates in an attempt to try and boost the consumption of big-ticket items like cars and houses. If this is the Fed’s chosen course of action, then it would be a valiant effort to try and boost economic growth in as we move into the end of the year.
The ECB remains in crisis mode
The ECB is also is expected to show that it remains in crisis mode when it meets in December, after hitting the pause button since the summer. The ECB is likely to extend its LTRO programme, and analysts estimate that the Bank’s Pandemic Emergency Purchase Plan (PEPP) will be extended to the tune of EUR 500bn, with the emphasis that further asset purchases are possible. Thus, as we move into the end of the year there could be plenty of central-bank generated liquidity sloshing around markets that could boost risk assets, and stocks, in particular.
Why the FX market is quiet as stocks decline
Interestingly, as stock prices fell on Monday, the FX market was fairly stable. This suggests to us that the same themes that dominated the stock market rally in November will prevail in the coming weeks. Namely, that optimism around a Covid-19 vaccine remain high, and that central banks will step in to fill the growth gap until economies are firing on all cylinders again at some stage in 2021. We continue to believe that dollar weakness will prevail through to the end of the year. USD/JPY and US stocks have an inverse correlation, and this correlation has not been broken, which suggests that Monday’s dip in stocks will be short term. Elsewhere, commodity markets also fell, as the markets waited for the outcome of this week’s Opec meeting, where production cuts could be rolled back. Brent crude was down approx. 1.5% at the start of this week. If Opec fail to agree a plan to roll back the production cuts enacted earlier this year then we could see a recovery in the oil price, and in energy stocks - and thus the FTSE 100 - later this week.
What to expect from jobs growth?
While markets will be waiting for the outcome of the ECB and Fed meetings in the coming weeks, there are key data releases this week that could impact market sentiment. The key event is the US Non-Farm payrolls report that is scheduled for release on Friday 4th December. The market expects a 520k gain in jobs, which is significantly lower than the recent trend, and would be the slowest pace of job growth since the steep decline in jobs in April. Jobs growth has been slowing in the last month or so as rising infection rates cause states to shut down their economies. Initial jobless claims have also been trending higher throughout October and November, which adds to the uncertainty around the November jobs report. If the labour market report fails to live up to expectations this week will this weigh on stocks? Using the S&P 500 as a benchmark, will the US index break back above 3,650, or will it dip below 3,500? We believe that the uptrend for stocks is very much intact and the prospect of a vaccine roll out as early as December will keep spirits high. Added to this, a weaker jobs report could still boost stock prices as it would put more pressure on the Fed to boost its stimulus programmes, which, as we mention above, is positive for stock prices. The difference for the S&P 500 rally as we move through to year end is that it is likely to be driven by cyclical stocks, such as consumer stocks and energy companies, rather than relying on tech as it did earlier this year. Thus, even if the jobs report disappoints, it is still worth banking on cyclicals.