After a positive week for risk assets, most notably again in UK equities and the Pound, the picture changed rapidly for the worse over the weekend as a full lockdown in London and surrounding counties was announced, and Brexit talks remained in deadlock despite yet another unofficial deadline of Sunday 20th December.
Talks between the UK and EU will resume on Monday 21st December with few signs that either is ready to compromise. Disagreements remain on access to British fishing waters and limits on state subsidies for business.
Positive economic data in the form of ‘flash’ PMI business surveys were released last week that revealed a recovery in European and UK services business sentiment and the continued resilience of manufacturing businesses. This meant that Composite scores rose, pointing towards an improvement in business conditions:
We saw another positive week for risk assets, with the UK a standout in terms of equity performance. The Pound was materially stronger against most major currencies, including moves of 1.11% against the Euro, 2.08% against the Dollar and 1.53% against the Yen, boosting the relative performance of domestically focused UK equities. Given this Pound strength, the FTSE 250 rose by 2.55% – head and shoulders above other regions – with European equities rising by just 0.34% in Pound terms, and US, Japanese and Asian indices all falling in value by between -0.76% – 1.49%.
Fixed income sectors broadly fell in this more positive equity market environment, with UK government bonds bearing the brunt; Gilts fell by 1.60% and inflation-linked Gilts by 2.27%, with corporate bond indices also dropping in value. Conversely, gold and silver prices reversed some of their recent weakness, with silver moving sharply higher in Pound terms by 5.87%, and gold by 0.38%.
Financial markets have started this week in a resolutely risk-off mindset given the events of the weekend, and this week may see further disheartening headlines serving to exacerbate this mood. Nevertheless, the vaccine rollout in the UK remains strong, with up to 500,000 having received their first jab by 20th December, and distribution only planned to increase from here.
Reports also suggest that the AstraZeneca/Oxford vaccine is expected to gain approval within days of Christmas, which will prompt mass vaccinations to begin on a scale hitherto unseen, using football stadia and other such sites along with the military’s assistance to inoculate the most vulnerable as quickly as possible. While the short-term outlook is gloomy, the medium-term looks decidedly brighter.
Market views by Ollie Stone – Head of Portfolio Management and Fairstone Private Wealth Ltd (21st December 2020)