The focus has turned again to the ongoing problems current virus restrictions pose, with a stricter lockdown starting tomorrow in Germany as the UK tightens rules in more regions with high infection numbers. London is to be placed under stricter restrictions for three days, and the Netherlands is also tightening its controls.

Even Sweden has introduced more restrictive measures, recently limiting the size of gatherings to eight (from 50) and imposing a 10 PM curfew, though restrictions there remain remarkably light by most standards, with the hospitality sector remaining fully open and with most people not wearing face masks, which aren’t mandated. Sweden was one of the worst hit European nations during the initial wave, but hasn’t mandated any lockdowns and in recent weeks and months has seen one of the lowest Covid deaths-per-million counts in Europe, with total respiratory illness and mortality rates within normal seasonal ranges. Covid in Sweden, as in other countries that couldn’t afford lockdowns (the experiences in Indian slum areas provide pointed examples), appears to have reached endemic equilibrium as a consequence of community immunity. The all-cause mortality curve in Sweden — the curve that doesn’t lie — is, as of week 48 of 2020, within the average (population adjusted) seen over the last five years. The year 2020, despite the pandemic, is set to be a year without excess deaths in Sweden.

European restrictions have been increasing. This will keep central banks on course to maintain accommodative financing conditions. However, the economic effects of restrictions should be proportionately less than in the first half of the year, as companies and consumers have learned to adapt.

Governing Council member Rehn stressed again that the ECB stands ready to adjust all instruments as necessary. He pretty much stuck to the script today, saying that the ECB continues “to preserve accommodative financing conditions” with its monetary policy and that bond purchases under the PEPP program “will be conducted in a flexible manner and over an extended period in order to preserve favourable financing conditions throughout the pandemic”. Nothing really new there and the comments on PEPP suggest a pretty neutral stance with Rehn neither focusing on the possibility to extend PEPP, as Panetta yesterday did, nor stressing that the volume has been turned from a target into an upper limit, as the hawkish camp is focusing on.

Stock markets are up in Europe, for the most part, as are US equity index futures, though off recent highs. Overall however European stock markets remain mixed, as the initial relief over the continuation of Brexit talks, that dominated yesterday’s session, abated. The GER30 is up 0.8%, but IBEX and MIB are struggling for direction and the UK100 is underperforming as Sterling continues to move up from recent lows.

The USDIndex has been heavy but above the 32-month low that was seen yesterday at 90.42. Conditions are thinning into year end. EURUSD has remained buoyant, near the 32-month highs at 1.2178. Markets are becoming thinner into year-end, and it seems that a more risk-cautious sentiment will prevail, which may see both the bull trend in global asset markets and the US Dollar’s downtrend lose steam.

The two Georgia run-off elections on January 5th present risk, as the outcome will decide whether the Republicans or Democrats will control the Senate. Democrats need to win both, which would leave the Senate with 50 Republican seats and 50 Democrat seats, with control swinging to the latter due to the tiebreaker vote of Vice President-elect Kamala Harris.

For currency markets, a Democratic presidency and a split House, which is the most likely scenario, is seen as bearish for the Greenback, while a Democratic presidency and House is seen as US Dollar bullish, or at least less US Dollar bearish (due to greater demand-side stimulus, driven by healthcare and infrastructure spending).

Hence the EURUSD outlook into 2021 remains bullish, on the proviso that global asset markets remain in a bull trend, which looks likely amid the mix of fiscal stimulus, prospects for a vaccine-assisted return toward societal and economic normalcy, an anticipated release of pent-up consumer demand in major economies, low interest rates, and so forth. In this scenario, the asymmetry between richly valued US stock markets versus comparatively lower priced markets in Europe and across the emerging world would entice further value-seeking capital outflows out of the USD. The Fed’s inflation tolerant policy rubric, which should keep US real interest rates on a loosening path, is also a key consideration, being a US Dollar negative.

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Andria Pichidi

Market Analyst

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