The Risk-On, Risk-Off See-Saw Is Back


Despite further rises in Covid-19 across much of the world and data suggesting that economic growth has slowed or stalled in most major economies, the mood in markets remains ‘risk on’. Equities seem set to end the week up in a majority of countries, although the rises again this week have been much smaller than in early November. Government bond yields were relatively stable during the week, while the US dollar remains under pressure. A key driver of this optimism is hope that a Covid-19 vaccine will start to be available relatively soon. Reports in recent weeks have pointed to early sign-offs by regulators and the possibility that the first inoculations would begin in December. So far, however, no official timetable has emerged in any major country, so markets will be looking for more clarity in the coming week. The current lockdown in England is set to end on 2nd December. Ahead of that, the Government has confirmed that a regional tier system will then we reintroduced and that most regions will go into the higher tiers. The news has prompted objections from industries such as hospitality that will be particularly hard hit and from a number of MPs. Reports suggest that, as a result, the Government may need the help of opposition MPs to win a Commons vote next week. Varying levels of restrictions continue in the rest of the UK, with a new two-week circuit breaker coming into effect in Northern Ireland. Brexit talks are set to resume on a face-to-face basis as they enter what has been widely described again as a crucial week. Sterling remains close to the top end of its recent trading range against the euro and has been firm against the dollar, suggesting that markets remain optimistic about the likelihood of a deal. EU chief negotiator Barnier is reported to be briefing EU fishery ministers today, which has prompted speculation that a compromise on a key area of contention is imminent. However, there is no official confirmation and both sides continue to highlight sticking points. Some observers are saying that a deal must be done next week to allow time for votes in the UK and European parliaments before year-end. However, reports also suggest that preparations are being made for emergency voting sessions post-Christmas.


This week’s updated forecasts from the Office for Budget Responsibility were the most detailed official estimate yet of the impact of the Covid-19 pandemic on the public finances and the economy. They showed an expected GDP decline of 11.3% and a public sector deficit of £394bn (or 19% of GDP) for 2020/21. Despite the huge deficit, Chancellor of the Exchequer Sunak raised the spending total for next year, saying that the immediate priority was combating the pandemic and preserving jobs. He said nothing about the longer-term policy outlook, but a number of economists have speculated that the deterioration in the public finances points to future tax rises. The coming week’s UK data calendar is fairly light. Possibly of most interest will be Monday’s Lloyds Business Barometer for November. As has been the case with other November surveys released so far, this is likely to have been negatively impacted by the rises in restrictions across the UK. However, it will also be interesting to watch whether later returns were lifted by the positive vaccine news. Among the already released November surveys were initial estimates for the manufacturing and services PMI. These were mixed, with services down sharply, albeit by far less than in the spring, while manufacturing unexpectedly rose from its October level helped by pre-Brexit stockbuilding both in the UK and on the Continent. Overall, that pointed to a fall in November GDP, but much smaller than the spring decline. We forecast only modest revisions to next week’s updates. The November construction PMI, which is a first reading, is forecast to slip from October, but still be above the key 50 level signalling expansion as the sector is less directly impacted by the current restrictions.


The coming week’s November Eurozone PMI data are also final readings. The initial data saw declines in both manufacturing and services, with the latter falling further, although not by as much as in the spring. The revised readings are forecast to be unchanged. Also out will be the November ‘flash’ CPI, which is expected to show another annual decline in prices and the October unemployment rate, which is predicted to tick up to 8.4% from 8.3%. ECB President Lagarde and several of her colleagues are scheduled to speak. This will be their last opportunity before the ‘silent period’ to signal their intentions for their December policy meeting when they are expected to ease monetary policy. This week’s US economic data were mixed but, on balance, suggested that activity has slowed by less than in Europe where restrictions have tightened more. However, whether that will remain the case with Covid-19 cases rising sharply is uncertain. Notably, initial jobless claims have picked up sharply in the past two weeks, possibly signalling a stalling in the jobs recovery. The November labour market report will provide more comprehensive information on that. We expect employment to surprise on the upside. Also of interest will be the ISM surveys, which are forecast to show the upturn in activity continuing. Finally, Fed Chair Powell and Treasury Secretary Mnuchin will testify to Congress about the effectiveness of policies designed to offset the economic impact of Covid-19. As Mnuchin has refused to extend the Fed’s emergency lending facilities, the dynamic between them will be interesting.

To discuss how the above may affect your money transfer requirements, please contact your Currency Dealer at Heritage Pay on +44 (0) 207 117 2934. None of the information in this article is, nor should be construed as, financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.

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