Profit-taking ahead of huge week

Stock markets are in the red on Friday, as we continue to see consolidation in the markets after a fantastic run since early November.

Little by little, we’re chipping away at the major risk events into year-end, of which there are many. The EU finally got backing for its 2021-27 budget and recovery fund this week, the failure of which could have made life complicated for the bloc at the worst possible time.

The ECB announced a raft of new stimulus measures, being the increase and extension of existing programs, as the central bank sought to continue to support the region through the winter surge of Covid-19. A severe outbreak has forced significant restrictions, heavily weighed on the economy and has been tougher to contain than hoped. There are more months to come as well, not to mention the festive period when people will be travelling and visiting family.

We’re only just starting to see the impact of Thanksgiving in the US, where record cases and fatalities are an enormous problem going into the holiday period. Obviously, this isn’t entirely the result of Thanksgiving; it started before and not enough has been done to bring it under control, as we saw earlier in the year. The next couple of months will get ugly and the vaccines will do little to change that.

All the more reason why it’s essential that Congress puts aside differences and finds agreement on a stimulus program before the end of the year, when past programs expire. The bipartisan package put forward a couple of weeks ago may be the basis for what will be agreed and lawmakers are running out of time to make whatever concessions are necessary.

The Fed has been demanding that lawmakers do more for months and may finally get its wish, just as it holds its final meeting of the year. More support is likely to be warranted from the central bank, following in the footsteps of the ECB this week and the BoE, RBA and others in recent weeks. An agreement on both may be enough to deliver the Santa rally we all crave.

Brexit no-deal starting to price in

It’s taken a long time but sterling finally appears to be pricing in the possibility of a no-deal Brexit, having almost fully priced it out just one week ago when it breached 1.35 against the dollar. The failure of talks between Boris Johnson and Ursula von der Leyen to resolve the impasse has been a real blow.

These talks were always going to happen, given that the same three issues have held up talks for months. But I think the assumption was that a compromise would allow negotiators to find a technical solution and, while they’re working to find one, there appeared to be no breakthrough at the political level.

That leaves us in fudge territory if a deal is going to be reached, barring a political compromise very late in the day, which is always possible in these situations. I remain optimistic that an agreement of some kind will be reached that avoids no deal, but it’s time for markets to reflect the possibility that it won’t happen. The gap below is huge if the UK leaves without a deal, after all.

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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