US Senate Race To Be Decisive

Market movers today

• We start off a busy week with a fairly quiet day with regard to economic releases, so market focus will be on possible new restrictions following the spreading of the coronavirus variant and US politics with the senate run-off tomorrow.
• Tomorrow, the run-off for the two US senate seats in Georgia takes place. The run-off is crucial as if the Democrats take both seats, they gain control of both chambers of the US Congress, allowing them to pursue their policy agenda more aggressively, see BBC for more details. The polls are very close with a slight advantage for the two Democrat candidates.
• The rest of the week is quite busy on economic releases with US ISM tomorrow, FOMC December minutes on Wednesday, euro area CPI and economic confidence on Thursday and finally US non-farm payroll on Friday, where expectations are low following the disappointing November figures.

The 60 second overview

COVID-19 restrictions set to be extended. As expected the short-term situation continues to be serious with infection levels high in the US and most of Europe, see COVID-19 Update: Israel leading the vaccination race amid concerns about new UK variants, 30 December 2020. New cases have generally come down somewhat but it is difficult to interpret infection numbers over Christmas as test levels declined. We need to wait for another week or so to see the real impact of Christmas and New Year gatherings. In our view many EU countries are poised to extend restrictions for at least another one to two months. The UK has warned of further restrictions following a very sharp increase in infections related to the new variant, see FT.

Vaccine development off to a slow start. Europe started vaccinations last week but has come off to a slow start increasing pressure to speed up the process. The EU has ordered an additional 80 million of doses from Moderna bringing the total to 160 million. Adding the 300 million doses ordered from Pfizer/BioNtech, EU can now immunise 230 million people in 2021. In Q1 the AstraZeneca vaccine will likely be added and the single-shot vaccine from Johnson & Johnson will follow in Q2 if proven effective and safe. It does not change the fact, though, that the coming months will be challenging – not least following the new more contagious variant from the UK.

Chinese PMIs decline. Caixin PMI manufacturing for December declined to 53.0 from 54.9 pulling back from the highest levels in nearly 10 years, see chart. The official PMI manufacturing as well as service PMI released last week also moved lower. The numbers fit well with our expectation that China is close to a peak and will slow down to a cruising speed recovery during 2021, see China Outlook: From rebound to cruising speed, 9 December 2020. This could forestall a peak in PMIs in the US and Europe as well soon.

Brexit deal removes another risk factor. The EU and the UK finally reached an agreement on a Brexit deal on 24 December removing a key risk factor for European growth. For an overview of the contents see BBC.

China-EU investment agreement. The EU also came to an agreement with China on the Comprehensive Agreement on Investment, which has been under negotiation since 2014, see overview here of what is in it for the EU. It was a bit of a blow for the new US Biden administration, which had urged the EU to wait in order to take a coordinated stance on China. With the deal China closed its second big deal in 2020 after it also signed the Regional Comprehensive Economic Partnership deal with 14 Asian countries in November.

Equities. Equity markets finished higher in the final session for the year, following a mixed session on Wednesday. In the US, S&P 500 closed up 0.6%, Nasdaq up 0.2%, Dow 0.7% and Russel underperforming -0.3%. This concluded a mostly buoyant week, though with defensives mostly leading. Asian markets are mostly upbeat this morning, with China and South Korea leading but Japan lower. US futures indicate a muted opening later today.

FI. 10Y German government yields as well as 10Y US Treasury yields continue to trade in a tight trading range. We still expect that the 10Y Bund yield will be in a -60bp to -40bp range. Spreads between the periphery and core-EU as well as credit spreads are close to or lower than pre-coronavirus levels as we enter the new issuance season.

FX. EUR/USD begins the year at an elevated level supported by the last-minute Brexit deal and we think there is further upside towards 1.24, as the Fed will maintain a dovish stance. Scandies saw support before New Year with EUR/NOK falling below 10.50 and EUR/SEK close to the 10.00 level.

Nordic macro and markets

The outlook for Swedish December Manufacturing PMI is a bit unclear as the two main leads, i.e. preliminary German manufacturing PMI (rising) and NIER manufacturing confidence (falling), diverged in December. That said, both suggest the activity level remained high. Norway also releases PMI data today.