Brexit Remains A Market Worry; Australia To Enact New Law On China

Australia has passed a law that can scrap China’s belt and road accords, Bloomberg reports. This has been in the pipeline since August when Australian PM Scott Morrison sought new powers to curb state government agreements with foreign governments. Specifically, the Victoria state government signed an agreement of understanding in 2018 with China’s national development and reform commission to work on belt and road initiatives. The federal government views this as overreach. It will inevitably be seen as a pushback against China in Australia’s escalating diplomatic spat. Note, though, that has been unperturbed by negative political developments vis-à-vis China this year.

The start of a more concerted push-back on China trade?

More broadly, China’s record out Monday highlights the weakness of its relative to that act as a fiscal drag on the world. As pressure on governments outside China to support consumer spending during the COVID-19 vaccine rollout increases, a concern that this will flow indirectly to China can only heighten global trade tensions.

Near term vs long term tug of war continues to play out in the stock market universe

The US equity market is trying to weigh near-term COVID-19-related headwinds vs. a better long-term vaccine and stimulus-related outlook. Action is tilted towards defensives and some of the mega-cap Techs today, Apple (NASDAQ:), Facebook (NASDAQ:), Adobe (NASDAQ:), (NYSE:), are all strong and active.

There continues to be more single-stock dispersion, looking at most subsectors’ performance and volume-wise. I have been fielding a fair number of questions on single-stock dislocations. Probably the biggest shift over the past week or so is active managers taking control again.

China’s soaring exports could herald in new trade tension in 2021

The much stronger-than-expected 21.1% y/y jump in China’s exports in November highlights the rapid post-COVID-19 recovery of its economy’s supply-side. However, the demand side is lagging. A perennial issue for China is that export revenues are not being passed on into higher wages, which helps explain relatively soft imports (4.5% y/y).

The result is the highest trade surplus ($75.42 bn) in China’s history, amounting to 6.3% of GDP (annualized). This dynamic highlights two risks for 2021 that imply increasing global trade tensions, hence why commodity linkers fly higher on the report.

First, a record China trade surplus will only add fuel to a building bipartisan consensus in the US that much more appreciation is needed at the least, alongside pressure on intellectual property rights and constraining China geopolitically.

Second, the weakness of China’s imports relative to exports acts as a fiscal drag on the world. As pressure on governments outside China to support consumer spending during the COVID-19 vaccine rollout increases, a concern that this will flow indirectly to China can only inflame global trade tensions.

Brexit on my mind

Elsewhere, UK-EU trade talks remain in focus. remains relatively well supported vs. EUR and USD and will likely remain so unless a breakdown in negotiations becomes more likely. Negotiations remain ‘live’, although progress is stuck on the key issues, namely, a ‘level playing field’, governance and fisheries. Press reports suggest UK PM Johnson will travel to Brussels on Wednesday to meet European Commission President von der Leyen, which also leaves open the possibility of a meeting with German Chancellor Merkel and French President Macron at the EU Summit on Thursday.

New California lockdown and further US sanctions on China

Stocks fell as coronavirus infections swept across US states, triggering fears of more restrictions.

Risk appetite is struggling to find direction amid Brexit headlines, rising COVID-19 case counts, and possible further US sanctions on China on the one hand and hopes for US fiscal stimulus and US vaccine approval.

US equities were weaker Monday, down 0.4% heading into the close. US yields slipped 3bps to 0.93%. Near-term growth concerns weighed on sentiment after California introduced new lockdown restrictions over the weekend. The number of people hospitalized in the US with COVID reached a new record. Still, to a large degree, price action suggests the stock market remains inoculated to COVID concerns, but it’s the Brexit” knife-edge” that carries this week’s worry baton.

A volatile 24 hours for sterling, falling sharply on the UK open Monday only to recover ground in the past few hours. In a joint statement Monday, UK PM Johnson and European Commission President von der Leyen indicated a deal Brexit was currently impossible “due to remaining differences on critical issues.” The Irish PM described negotiations as “on a knife-edge,” and The EU’s chief negotiator has suggested Wednesday is shaping up as a hard deadline for talks.

Despite fraught headlines, The European Commission’s von der Leyen said after a call with UK Prime Minister Johnson that both asked negotiators to prepare a list of differences to be discussed in person “in coming days.” Chatter about Johnson heading to Brussels to get the deal done has massaged some of the market more worrisome concerns that PM Johnson doesn’t want the deal.

Presumably, that means before the Dec. 10-11 EU Summit, or maybe even coinciding with it. If so, that would be a proper showdown and bring the highest possible chances of a breakthrough. Should we have expected anything other than a nail biter after multiple years of bitter squabbling? Probably not. And I would suspect trader will now focus less on chasing unreliable headlines and focus on the official facts.

Investors are adopting an all too familiar stance trying to weigh near-term COVID-19-related headwinds vs. a better long-term vaccine and stimulus-related outlook. But something to think about when it comes to COVID-19 vaccines is the take-up from the general public, which is something The Wall Street Journal [paywall] looks at today.

It cites two recent surveys that suggest a fair amount of skepticism in Europe towards the vaccine. A poll in November from the University of Hamburg showed those hesitant or unwilling to take the vaccine was at around 40% across seven European countries. An Ipsos poll taken in early October found that almost one-third of Japanese and nearly 50% of French respondents also said they wouldn’t get vaccinated. The Ipsos poll put the primary reason down to concerns over how the vaccine was developed. Keeping in mind vaccines don’t help the economy recover, but vaccinations do

Iinvestors are pinning their hopes on the ultimate holiday stocking stuffer, which is the capacity for stimulus overwhelming a near-term downturn. Last week’s softer than expected US employment report might have injected some urgency into US fiscal negotiations. These center on a USD908bn bipartisan proposal, which one of its authors, Senator Bill Cassidy, suggested would get President Trump and Senate Majority Leader Mitch McConnell “on board” (Fox News).

Oil prices

traded back below $46 a barrel amid softness across commodities and global stocks. The higher added a bit of pressure overnight and weighed on the broader commodity complex.

Prompt oil contracts remain especially sensitive to increased virus caseloads globally. In some cases, problematic healthcare concerns leave politicians with no options but to instate stay at home orders. California, one of the US largest road fuel demand states, will be in lockdown lite through what is bound to be a Christmas lite for the oil markets.

While the vaccine development, “hope” is largely priced into the back end of the curve.

Over the next few months, and despite worst-case scenarios having all but evaporated, the main driver for oil markets within an increasingly tighter range between now and a wider distribution of the vaccine rollout could be the pace of global vaccinations, especially in hard-hit countries like the US vs. the COVID resurgence speed, similar to how shifts in mobility drove oil through the spring and summer.

As more folks in the general population get vaccinated, mobility will increase substantially. And if the oil price is to be measured by mobility from point a to b, we might have to add t to the equation as travel demand will most certainly see more planes in the sky post-global immunization.

But with the medium-term oil prices now inoculated and the curve moving into backwardation—when prices for delivery in the near term are higher than those for later delivery. The amount of crude oil held in tankers dropped to below 100 mn barrels last week. When the contango is steep, there is more appetite for storage. The steeper the contango, the more economic sense it makes to hold oil for future delivery.

A key risk to the supply-side remains Iran, which is reported to be preparing to raise production quickly, according to President Rouhani, who expects US sanctions to be softened under a Biden presidency.


The pound has pared back some of its Brexit enthusiasm after a flurry of headlines, some citing earlier progress, others suggesting deadlocked negotiations saw sterling get pounded overnight. Despite the fraught headlines, the read-through is that negotiations continue still the mood music is somber in early Asia.

It is a big week ahead for the , with Brexit negotiations, an EU leaders’ summit, and a key ECB meeting all looming. Squabbling around the EU budget and the associated EU recovery fund continues, potentially delaying funds’ disbursement. At the same time, more worrisome lockdown clouds gather on the euro’s near term horizon. France is unlikely to emerge from its lockdown in mid-December while policymakers in Germany may tighten restrictions in affected areas). These economic challenges, alongside a trade-weighted EUR back to levels not seen since mid-2018, could form the backdrop to the ECB’s December meeting.

The Fed blackout ahead of the December 16 started Saturday. We have now heard what we are going to hear ahead of that get-together. And while there have been 1000’s of Fed mentions since the last FOMC, but the common theme that continues to echo is the emergency has passed, but the next six months will be challenging, so it would seem everything hinges on the vaccine where current visibility is especially low To expand stimulus now would be to move just ahead of critical new information (Q1 vaccine rollout/efficacy information).


headed for its fourth gain in five sessions helped by signs of progress on a US stimulus plan and concerns that Brexit talks could collapse.

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