[Market Review]
The UK-EU negotiations were once on the verge of breaking down. Earlier, the media reported that Johnson let slip that he was ready to withdraw from the EU trade deal negotiations within hours. This severely undermined the confidence of many in the market, and the pound plunged 200 points against the U.S. dollar. In the subsequent Anglo-European statement, the two sides said that there are still “significant differences” on three key issues: fair competition, compliance management and fisheries. News that in order to break the impasse in the negotiations, Johnson will travel to Brussels and von der Leyen for talks. One of the main reasons for the pound’s decline is that many investors and leading investment bank analysts believe that the commitment of both sides to further negotiations means that there may still be hope for a resolution to the impasse.
Wednesday may be a key cutoff point for UK-EU negotiations. British officials have previously warned that unless negotiators make a breakthrough quickly, the talks could break down. EU officials say Wednesday is the final point for reaching an agreement. After a deal is reached, both sides still need to get approval from the European Parliament and the U.K. Parliament to ensure that the agreement can be implemented after the U.K.’s Brexit transition period expires on Dec. 31.
Euro Wide Oscillation. The risk of a hard Brexit, which at one point sent the euro to a three-day low of 1.2078 against the dollar, was followed by the release of upbeat data that helped the euro pare its losses. The survey results released on Monday showed that the eurozone’s investor confidence index rose more than expected in December, touching the highest since February.
Negotiations in the US Congress around the stimulus package decelerated. Suddenly there was huge negative news about Brexit, depressing European currencies and strengthening the U.S. dollar. The U.S. dollar index climbed to 91.25 at one point, then gave back most of its gains and returned above the 90 level. U.S. Senate Majority Leader Mitch McConnell said the Senate will pass a week-long temporary spending bill to avoid a government shutdown. However, the negotiations around the $908 billion bailout package did not make much progress. U.S. Senate Minority Leader Chuck Schumer said McConnell refused to compromise on the bailout bill. Hopes for a job surge during the year-end holiday season are fading fast as the neoconavirus shows no signs of receding and several states are reverting to stricter lockdowns to slow the spread of the virus. Unless a bipartisan compromise is reached soon, millions of Americans could lose what little income they have when the emergency aid provided by the bill expires at the end of December.
Gold surged $20. Boosted by the US dollar’s dip and the possible collapse of Brexit negotiations, gold rose $20 during the day, reaching as high as $1868.42 an ounce.
Silver rallied violently. Silver’s trend was roughly similar to gold’s. Previously, silver was trading at $24. Earlier, silver prices were hovering low around $24. By late afternoon, silver pulled up 4% to reach $24.76 per ounce.
U.S. oil rose and then fell. Finally, let’s look at the oil market. The risk to near-term demand posed by a renewed neo-crown outbreak cast a shadow over future vaccine-induced optimism. In addition, Iran’s stated readiness to increase exports has also put pressure on oil prices. U.S. oil rose, then fell, and is currently trading near $45.5.
In the bond market
Overnight, the yield on China’s 10-year Treasury note rose by 0.33%, while the yield on the US 10-year Treasury note fell by 4.97% and the yield on the US 3-month Treasury note fell by 19.73%.
In the stock market
U.S. stocks closed mixed, with the S&P 500 down 0.19%, the Nasdaq up 0.45%, and the Dow Jones down 0.49%; by this morning, China’s stock market opened mixed, with the Shanghai Composite Index up 0.03%, the ChiNext Index up 0.35%, and Hong Kong’s Hang Seng Index down 0.18%.
[Key Outlook]
Euro: Dual factors to support the euro next year or rise to 1.25
The euro should strengthen against the dollar in 2021 and is expected to reach the 1.25 level by the end of 2021, due to optimism in the vaccine market and the Federal Reserve’s loose monetary policy, according to ABN AMRO. If European leaders avoid a hard Brexit and resolve their differences over the EU budget and recovery funds, the EURUSD could move up to 1.30 next year.
Pound: if the UK and Europe reach trade talks, the pound may rise to 1.35
Investors believe that the commitment of the UK and the EU to further negotiations means that there may still be hope for a resolution to the impasse. Standard Chartered Bank said it would be difficult for the two sides to reach a final compromise if the deadline is not looming. The bank expects the pound to rise above $1.35 if an agreement can be reached.
Swiss franc: U.S. employment outlook is weak, U.S. and Swiss expected to fall
The Bank of Tokyo-Mitsubishi UFJ believes that USD/CHF is expected to maintain its bearish stance, possibly gaining support at 0.85. The U.S. employment is weak and the Fed will increase its easing to support the economic recovery. U.S. employment is weak and the Federal Reserve will increase its easing policy to support the economic recovery. If inflation rises and monetary easing remains effective, the Swiss franc is one of the main beneficiaries of the currency devaluation trade, in addition to the gold price.
[Key Outlook]
18:00 Eurozone GDP expected to pick up in Q3
Focusing first on Eurozone GDP, it has been declining steadily since Q4FY18, falling to -14.7% in the second quarter of this year. In the middle of last month, the Eurozone announced a revised annualized third-quarter GDP rate of -4.4%.
Currently, the market expects the euro zone third quarter GDP final value of -4.4% annual rate, if the published value is better than expected, or good for the euro; otherwise, or negative for the euro.
Compared to the second quarter, the eurozone GDP picked up significantly in the third quarter, which is supportive for the euro.
Also of note this week is the EU Council summit that will take place on Thursday. At the meeting, the participating countries will discuss a new round of European bailout programs. Analysts believe that the summit may have more discussions around the next EU budget, including a 750 billion euro joint recovery package.
Furthermore, there is the ECB’s upcoming interest rate decision. There are reports that the bank will expand QE by at least 500 billion euros, and may extend it for six months. Previously, the ECB Governing Council has made it clear that a new round of stimulus measures is coming.
Wednesday 05:30 API crude oil inventories expected to decrease
Next, let’s focus on the US will release API crude oil inventories. Last week, the API report showed that U.S. crude oil inventories increased by 4.146 million barrels, much higher than expected. This was followed by a small decrease in EIA crude oil inventories.
By this week, the market is expecting a decrease of 1.514 million barrels in US API crude oil inventories for the week ending December 4. If the published value is larger than expected, oil prices may come under pressure; otherwise, oil prices may rise.
The recent resurgence of the neo-crowning epidemic has cast a shadow over near-term demand for crude oil. In addition, Iran has indicated that it is ready to increase exports, which has also put pressure on oil prices.
Also of note today are the following data.
14:45 Swiss November quarterly unemployment rate: previous 3.3%, forecast 3.4%.
15:45 France’s Oct trade account: previous -5.75 bln euro, forecast -5.416 bln euro.
18:00 German Dec ZEW economic sentiment index: previous value 39, forecast 46.
18:00 Eurozone December ZEW economic sentiment index: previous value 32.8.
18:00 Eurozone Q3 Quarterly Employment: Previous value 0.9%.
19:00 US NFIB Small Business Confidence Index for November: previous value 104, forecast 102.5.
Wednesday 01:00 EIA releases its monthly short-term energy outlook report.
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