US retail sales sparks consolidation

US stock markets directionless

US equity markets drifted lower overnight, as US Retail Sales disappointed. That was enough of an excuse for investors to bank some recent gains in equity and energy markets, although currency markets continued to drift aimlessly. The buy everything trade is certainly not forgotten though, with big-box retailers in the US producing excellent results overnight, capping what has been an outstanding Q3 earnings season in the United States. Johnson & Johnson also said it was on track for its Covid-19 vaccine approval by the end of the year, or early in Q1. That news was mostly ignored, likely because J&J has yet to publish official data from phase-3 trials.

If J&J’s announcement sneaked under the market’s radar overnight, as investors concentrated on retail sales, it did highlight that we can expect more vaccine manufacturers to indicate initial success or failure by the year-end. The next out of the blocks likely to be the Astra-Zeneca/Oxford University candidate. With two viable vaccine candidates, even an inevitable failure or two from here should not seriously dent the great rotation trade. And should more successes be announced, if anything, that trade is likely to accelerate. That should be good news for ASEAN markets, heavy with cyclical and primary industry companies, and light on technology ones.

US Retail Sales sent a warning shot that Covid-19 is still with us, and its effects will not miraculously disappear overnight. The 0.30% increase was disappointing, coming in even lower than the 0.50% forecasts, themselves a fall from the 1.60% seen in September’s month-on-month print. In Europe, and especially the US, Covid-19 cases continue to soar, and movement restrictions across states continue to tighten. There will be an inevitable flow through into the data for November and December. Covid-19 may still be the Grinch who stole Christmas. Q4 earnings may well feel the effect, and overall, the gains flowing through in economic data globally in Q3, will be much harder to come by in Q4, and that includes China.

Japan’s Balance of Trade highlighted the challenges faced by many countries still. Although the headline number rose to yen 873 billion, exports were flat, and the surplus was flattered because imports collapsed by 13.30% YoY for October. That is a slight improvement over September’s 17.70% fall, but highlights that it is Japan’s manufacturing and export sector that is carrying the burden of recovery. Like Indonesia, Malaysia and Singapore, domestic demand remains in intensive care. That situation is unlikely to change until international borders reopen once again. A similar fall in domestic activity likely awaits the US and Europe for the remainder of the year.

Against this backdrop, we can expect monetary policy to remain ultra-easy globally for all of 2021. Central banks are keeping the lights on in 2020, and will enthusiastically fill the sails of economic recovery with a following monetary wind in 2021. That will continue to underpin the rally in asset prices globally, even if financial markets pause for direction as we have seen over the past 24 hours.

The data calendar is light globally in the day ahead, and decidedly second tier, leaving markets vulnerable to headline-driven surprises. One source of volatility maybe the United Kingdom, with the Irish prime minister stating that the UK and Europe can see a “landing zone” on a trade deal, if the UK compromises. Markets have been pricing in the certainty of a Brexit trade agreement for some time now, reflected by the consistent grind higher by sterling in recent weeks. More positive headlines today could see sterling and UK equities take another leap higher.

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