As we are heading into the final month of the year, we are looking back on 2020. The year of many unprecedented events taking place.
2020 has truly been a year of challenges and tests. We have witnessed a number of unprecedented events, from the global pandemic to unemployment. But also, violent market crashes and subsequent recoveries. At the center of attention have been the central banks. Namely, the Federal Reserve Bank of the U.S., the Bank of Canada, the Bank of Japan and the European Central Bank. The quantum stimulus in the form on quantitative easing and ultra-low interest rates has been astounding. The Fed’s balance sheet from buying U.S. government debt has expanded to 33% of U.S. GDP, BoC’s stands at 27% of Canada’s GDP, BoJ’s is at 130% (!) of Japan’s GDP, and the ECB is at 60% of Euro Area GDP. Central Banks are buying up their respective government debt and other instruments to increase money supply and thereby attempting to increase money velocity and economic activity. This round the central banks have taken it a step further, and on top of buying government debt, they also started purchasing corporate debt when credit markets started showing signs of distress in March. BoJ has not shied away from entering equities market and now owns 60% of JGB market and around 6% of equities ETF market (the latter added US$ 50 billion capital gain for BoJ last quarter from rising equity markets!). This means that central bank actions are creating price distortions not only through ultra-low rates and search for yield, but also directly in the public markets domain by pushing asset prices higher. Also, central banks are in charge of determining the level of the base interest rates. Base rates (EURIBOR in Euro Area) are used by all financial institutions in that jurisdiction and are really the base of financial system. Most central banks have committed to keeping interest rates at the currently levels, which is near 0%, for the foreseeable future. Hence, it’s safe to say that central bankers have a fair share of impact on our daily lives, whether we realize it or not.
Economic data is showing signs of freezing as we are nearing the coldest months of the year. A number of data points last week indicate that economic activity is slowing down. French manufacturing PMI contracted from 51.3 to 49.1 which is the worst print since June. Euro Area PMI Composite also declined from 50.0 to 45.1, whilst German and Japan remained expansionary but lost momentum (respectively 57.9 vs previous 58.2 and 48.3 vs 48.7). PMI, or Purchasing Managers’ Index, offers visibility on how businesses on the ground gauge their industry trends and activity. It’s a diffusion index and based on survey across 19 industries. It’s an important leading economic indicator as it’s directly from the people who have their skin in the game. Movements in PMI data often give an early heads up about the health of the economy, and hence can be used to build a view about currency markets. Weak data from the Euro Area is concerning as Europe, or at least some member states, have the risk of facing double dip recession. ECB has already expressed their concern about this outcome and is expected to announce new measures, or re-calibrate their instruments, on December the 10th at their next meeting. We can expect more bond buying and cheap loans which potentially might weaken Euro.
Markets have been muted after post-election euphoria – S&P500 was down 1.5% last week, while Nasdaq100 ended the week flat. Gold lost 7 basis points and USD, measured by DXY, shed 7 basis points.
Have a great trading week ahead!