The week that was:
COVID-19 cases and deaths spiked in the US and Europe, with new cases surpassing 732,500 globally, nearly a third of which occurred in the US. Despite those numbers, US equity markets rallied on the hope of further stimulus. The S&P 500 and the Dow Jones both reached record highs. Asian markets were slightly up, and European markets traded sideways amid COVID lockdowns and uncertainty over Brexit.
A panel of advisors from the US Food and Drug Administration endorsed the Moderna vaccine on Thursday, clearing the way for approval by the agency.
Oil continued its seven-week rally, climbing to pre-pandemic levels, largely based on hopes of a massive rollout of vaccines. All eyes will be on OPEC when ministers meet in early 2021 to review compliance with the historic cuts and plan for the future.
The US Federal Reserve maintained its bond purchases of $120 billion on the low end. Interest rates were kept between 0 and 0.25 percent with a view to leave them at this level until 2024 at least, or until inflation has risen above 2 percent and unemployment returns to pre-pandemic levels. Fed Chairman Jerome Powell warned that the next few months would be challenging.
US first-time jobless claims supported Powell’s assertion, reaching 885,000 for the week ending December 12, an increase of 23,000 on the previous week and the second week in succession in which the number has risen.
Bitcoin reached two record highs in as many days, first breaking the $20,000 barrier on Wednesday and then surpassing $23,000 on Thursday. Guggenheim Investments CIO Scott Minerd thinks the cryptocurrency could eventually be valued at $400,000. He based his comments on the limited supply and likened the crypto currency to gold. In reality, there is still a way to go before bitcoin becomes a reliable store of value rather than a speculative bet, but we have seen the first step on that journey, with institutional money flowing into cryptocurrencies for the first time.
The US Treasury labeled Switzerland and Vietnam currency manipulators — a tag applied by America to countries where the bilateral trade deficit surpasses $20 billion (actual $51 billion), the current account surplus is above 2 percent of GDP (actual 8.9 percent) and foreign exchange interventions are above 2 percent of GDP (actual 5 percent). There are no sanctions associated with the currency manipulator label. It is generally used by the US as a tool in trade negotiations. For example, earlier this year China was removed from that category by the US in line with negotiations for the Phase 1 trade deal.
Switzerland is a very small open economy with a very limited domestic bond market. The export sector is an important part of the employment market, which informs the SNB’s decisions. The Swiss Franc has steadily appreciated since the financial crisis that began in 2008, despite SNB interventions. Economists widely expect the Swiss Franc to maintain its status as a haven currency. The incoming Biden administration may be less hawkish on “currency manipulation” as it is expected to engage in a more conventional approach towards trade.
Saudi Arabia released its budget, which was a testament to prudent financial management. The deficit reached 12 percent of GDP, which is low by international standards. GDP will contract by 3.8 percent in 2020 and is expected to increase by 3.2 percent in 2021. The Kingdom was hit by the double whammy of lower oil production and lower oil prices. Saudi Vision 2030 proved its validity when non-oil contributions to GDP rose from 31 percent in 2019 to 43 percent in 2020. The budget will support Saudi Vision 2030, the health sector and the private sector, with a particular focus on SMEs.
Dubai continues realigning its battered real-estate sector, which has been on a losing streak since 2008/2009 — with the exception of 2013/2014. ICD, Dubai’s sovereign wealth fund, asserted its control over Meydan, splitting its horse-racing activities from its real-estate activities. The latter will be run out of Nakheel PJSC, over which ICD asserted control earlier this year. A joint venture between Meydan and Indian developer Sobha Developers is said to have been cancelled.
Commodity markets may be at the beginning of the next supercycle according to Goldman Sachs’ chief commodity analyst Jeff Currie.
The previous two supercycles took place in the 1970s and the 2000s. In both cases, the commodities sector was underinvested, as it is again today. In 2000, like today, there was an element of the old economy ‘taking its revenge.’ The turn of the century saw the end of the dotcom boom, while China’s growth fueled literally all commodities.
2020 saw an inordinate rally of the FAANGs (the five US tech giants, Facebook/Amazon/Apple/Netflix/Google) and their peers, which seems unlikely to continue at the same pace. This will lead to a redirection of investments into other sectors.
Energy transition and the rebuilding of pandemic-ravaged economies will require certain commodities, especially copper, iron ore, zinc, and sliver. The first is important for electrification and electric vehicles, which use three times more copper than conventional cars. The second is pivotal for building windmills and other sources of clean energy. Copper surpassed the $8000/t mark on Friday, its highest price in seven years.
Oil will benefit too, as it remains the major transportation fuel, and both trade and travel will pick up post-COVID.
Capital discipline among mining and oil companies has become very strict as a new tight-fisted breed of managers have moved into the c-suites. Oil is a good example: Big Oil cancelled or postponed around 40 percent of CAPEX for 2020 amid falling prices. Both oil and mining investments have a long lead time before production, which means that demand will recover well before supply, leading to higher prices — a thesis which seems supported by the backwardation of the various commodity prices.
Where we go from here:
US Congress is deliberating a new stimulus package of around $900 billion, which is said to include $600 in direct payments for individuals and $300 per week in supplemental unemployment insurance. Observers believe the package will include $17 billion for airlines too. The package and the budget need to be passed by Friday night in order to avoid a government shutdown.
Brexit negotiations continue, with EU chief negotiator Michel Barnier saying the “moment of truth” had arrived and UK Prime Minister Boris Johnson still insisting that the EU needs to compromise further on fishing rights. Whatever the outcome of the talks, a potential deal will be minimal and require major customs and excise formalities (even without tariffs).
The US has placed a myriad of additional Chinese companies on its restricted list, including chip maker SMIC, which had already previously been put on a list by the DoD (Department of Defense) for being partially owned by the PLA — China’s armed forces, something the company denies.
Beware of the potential for increased market volatility over the year-end period as trading thinning out and algorithms are taking over while senior traders enjoy their holidays.
- Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources