Friday, 11th of December 2020
“We know what happens to people who stay in the middle of the road. They get run over.”
– Nye Bevan
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Global equities lost some momentum this week, as investors took profits after six weeks of giddy market gains. The S&P 500 had shed -0.8% for the week by Thursday’s close, while the pan-European STOXX 600 Index was down -0.2% over the same 4-day period (and has since lost a further -1.0% this morning). The only major index that has bucked the trend this week is the MSCI Emerging Markets Index, which is up +0.3% (in USD) ahead of the Friday trading open. A confluence of factors is responsible for the stock market wobble. These include the tense atmosphere of Brexit talks, the ratcheting up of covid-19 restrictions around the world, the waning of hopes for a US fiscal stimulus before year-end, and the emerging splits over monetary policy on the ECB Governing Council; and they overshadowed the start of the coronavirus vaccine roll-out in the UK, the Western world’s first.
However, not all stocks were in negative territory this week (far from it). And leading the pack of positive performers was Airbnb. The firm IPOed at $68/share on Wednesday, which was well above its expected IPO price band only a few days ago; and it still managed to close >$140/share on Thursday – its first trading day – as a flood of retail interest caused the stock to double! What this price move means is that investors currently see the loss-making asset-light booking app as being more valuable than Marriott, the world’s largest hotel group. That is some claim. And this eye-watering post-IPO surge is just the latest in a string of massive daily moves by technology stocks this year. From Tesla to Zoom, companies that sell enough hope seem increasingly able to turn those conceptual revenues into hard cash now. In many ways, this is not a surprise given the backdrop of the pandemic. With so many firms struggling to refinancing their depleted capital structures, laying off workers, and closing shopfronts and factories, stories about a profitable future are much more appealing than stories about a torrid present. Nevertheless, the sector dispersion and frothy price action we have seen in equities this year suggests that bubbles are forming under the surface. We would not recommend that you exit the market. Afterall, there is a big reflation to play! But buyer beware – yesterday’s winners could well be tomorrow’s losers. And we suggest that you diversify your equity portfolios before the rotation catches you off-side.
On the subject of big surprises, we still believe that one is coming on Brexit. If you read the newspapers, all is lost. Negotiators on both sides are apparently glum, fatalistic, and incapable of further compromise in the three main areas of ongoing disagreement: (1) the level of EU access to the UK fisheries, (2) the level of UK access to the EU Single Market (given the UK government’s desire to maintain regulatory flexibility), and (3) how the deal terms should be enforced. However, such media narratives (supported by unnamed sources from ‘inside the room’) are clearly being planted by UK and EU officials to pressure the other side into doing a deal more favourable to them. Of course, there is a chance that these reports do accurately reflect the mood of UK and EU officials… But there is simply no way of knowing because, either way, there will be no reported breakthrough until the very last moment (as in every previous EU negotiation). So, we fall back on the strategic fundamentals. The EU and UK are partners in international affairs, geographical neighbours, and economically highly integrated. They are political and cultural kin who face similar threats and futures whatever shape Brexit takes. At present, they also happen to be totally aligned on all regulatory issues that could otherwise cause a deal to break down. A no deal Brexit is not in either side’s interest. And it would tarnish the legacies of those who have spent years thrashing out a deal in London and Brussels. So, we hold our nerve – and on to our UK equities for now.
Across the Atlantic, in the US Congress, another set of important negotiations seems to have hit a bump in the road this week. Early on, it seemed that House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell were inching towards a breakthrough in fiscal stimulus talks. But after the Democrats poured cold water on McConnell’s proposal of a ‘skinny deal’ to cover the least complex issues first the chances of a US fiscal stimulus before Christmas have more or less evaporated. Both sides recognise the need for a new fiscal package to support the economy, but they have tussled over its size and scope for months. The situation is so serious that Fed Chair Jerome Powell has begun to voice his frustration with the lack of progress in public. However, it seems that political partisans will rule the day once more.
Investors may not be getting any Christmas gifts from McConnell and Pelosi this year, but Lagarde (and the ECB) just delivered another EUR 500bn monetary stimulus right to their door. The liquidity will be injected via the ECB’s PEPP (i.e., bond-buying) programme with purchases extended by 9 months until March 2022. In addition, the TLTRO III programme of cheap loans to banks will be extended until June 2022. The size of this intervention reflects the dire straits in which Europe’s economy find itself. Rather absurdly (at least in normal times), it actually underwhelmed market participants. Under pressure from hawks among the ECB Governing Council, Lagarde stated that the funds ‘need not be used in full’, which suggests that the face value of the package should be seen as a ceiling (and not a target). There have been reports of growing splits at the ECB – as usual between Northern hawks and Southern doves – over the extent of QE that is appropriate. This undermines the power of stimulus measures like those announced this week and how the drama plays out will have implications for credit and equity markets going forward. We are certainly watching closely.
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