As of noon on Friday, global equities were lower on the week amid an ongoing economic retrenchment due to the continued surge in coronavirus infections, lack of progress toward a COVID-19 relief bill in the United States and deadlocked trade talks between the European Union and the United Kingdom. The yield on the US 10-year Treasury note eased to 0.89% from 0.95% a week ago while the price of a barrel of West Texas Intermediate crude oil rose $0.75 to 46.75. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 24 from 21 last week.
EU and UK prepare for no-deal Brexit as talks stall Hopes rose last week that a post-Brexit trade deal was in reach, but optimism has faded as negotiators have failed to work out acceptable rules for UK access to EU markets and an enforcement mechanism to adjudicate disagreements. UK Prime Minister Boris Johnson warned last night that talks may very well fail since the EU seeks to keep the UK locked in its orbit. Talks continue, with Sunday seen as a final deadline. Contingency planning for a no-deal Brexit has ramped up on both sides of the channel in recent days, with disruptions in trade flows seen as likely early in the new year even if a deal is reached, given how long the negotiations have gone on. Markets are pricing in the increased risk of no deal. The pound has fallen about 2.5% versus the dollar this week while UK gilt yields have declined and the yield curve has flattened.
US COVID relief negotiations remain at impasse For months, policymakers have been unable to break a logjam blocking much-needed relief from the economic aftershocks caused by the coronavirus pandemic, and talks remained deadlocked as the end of 2020 approaches. While the overall size of the plan no longer seems to be the main issue, how the funds are divvied up, to whom and under what conditions, is. Republican lawmakers continue to insist on liability limits to protect businesses, educational institutions, health care providers and other organizations from coronavirus-related claims. Democrats continue to press for substantial additional funding for state and local governments to defray increased costs and revenue drops caused by the pandemic. There had been hopes that a relief package would be made part of a must-pass government funding bill, but in the next few days lawmakers are likely to instead pass a stopgap measure that would fund the government through 18 December, while continuing talks on pandemic relief over the holidays.
ECB delivers additional policy accommodation As widely expected, the European Central Bank eased financing conditions further on Thursday, adding an additional €500 billion to its Pandemic Emergency Purchase Program and extending the program's term for at least another nine months until March of 2022. The central bank will offer three additional targeted long-term repurchase operations in 2021 to provide funding to banks at deeply negative rates, and it extended reinvestments under its asset purchase program until 2023. ECB President Christine Lagarde repeatedly stressed the bank's intention to maintain favorable financing conditions going forward, which market observers infer will translate into the ECB tightly controlling rates along the yield curve.
Vaccine rollouts begin Great Britain became the first western nation to administer a coronavirus vaccine this week, and Canada, after approving the Pfizer/BioNTech injection for distribution this week, will follow close behind. A US Food and Drug Administration advisory panel gave the same vaccine the green light, paving the way for emergency-use authorization in the coming days.
US household net worth hits record The US Federal Reserve reported on Thursday that household net worth in the US hit a record in the third quarter, rising to $123.52 trillion, a quarterly gain of 3.2%. Household debt rose 5.6%, its fastest pace in two years, to $16.4 trillion. Rising home and asset prices and increased savings pushed the net worth figures higher.
US mortgage originations are on pace to surpass those preceding the global financial crisis, the Wall Street Journal reported. Refinancings made up 65% of all originations, the paper said. Compared with the mortgage crisis of the mid-2000s, lending standards today are tighter while refis are somewhat less risky than new loans because borrowers often have significant equity in their homes.
Hungary and Poland came to an agreement with the EU on rule-of-law provisions in the union's €1.8 trillion budget and recovery fund, allowing its passage.
Germany's ZEW investor sentiment index jumped to 55 in December from 39 in November on optimism over vaccine developments.
Real (inflation-adjusted) yields on US investment-grade corporate bonds turned negative this week.
Japan announced a substantial additional stimulus package to battle the economic effects of the coronavirus this week.
The S&P 500 Index closed at a record high above 3700 on Tuesday before retreating modestly later in the week.
US weekly jobless claims jumped to 853,000 from 716,000 a week ago as increasing coronavirus restrictions hit the services sector.
The European Central Bank is projected to own around 43% of Germany's sovereign debt by the end of next year and around 40% of Italy's. Buying by the central bank pushed Spanish 10-year yields into negative territory this week.
S&P Dow Jones announced it will remove from indices a number of Chinese firms blacklisted by the US government. Ten companies will be removed prior to the open on 21 December. S&P Dow Jones will also delete 20 Chinese firms from fixed income indices by January 1, it announced. FTSE Russell removed eight Chinese companies from its indices last week.
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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