Monthly Review: December 2020

Monthly Review: December 2020


United States

Covid19 and ensuing lockdowns weighed on the economic figures. Trump finally signed the massive $2.3tr relief and government funding bill, averting a government shutdown. US payrolls missed the estimates at 245,000 and unemployment rate dipped to 6.7%, with a worrisome decline in Americans participating in the labour force. The private sector saw its growth momentum stall somewhat in December (retail sales decreased 1.1%), as did the manufacturing sector (Empire State manufacturing index at 4.9 points in December and industrial production at 0.4% in November).

Euro area

While Q3 performance was strong with the Eurozone real GDP rising by 12.5% QoQ in Q3 from an 11.8% slide in Q2, the evolution of the pandemic pushed some countries to reinitiate lockdowns. Composite Eurozone PMI improved from 45.3 to 49.8 indicating a form of resilience to the second coronavirus wave. The manufacturing sector continued to outperform service. There is some improvement in corporate sentiment, with the press release noting that news flow around the vaccine roll out had improved business confidence.

United Kingdom

London and Brussels made efforts to avoid the “no deal” with an extension of the discussion beyond the due date with December 31th as a deadline. After months of uncertainty, Britain and the European Union have struck an agreement on a post-Brexit trade deal. Retail sales grew 0.9% in November, down from 4.9% annual expansion in October, indicating minimal damage caused by the second lockdown. Nevertheless, monthly GDP was limited to a mere 0.4% gain in October, as the second Covid19 wave took a heavy toll on hospitality.


Swiss GDP grew by 7.2% QoQ in the third quarter, after a decline of 1.7% in Q1 and 7% in Q2. This is much better than its European peers. Nevertheless, a resurgence of infections and renewed lockdown measures means the near term outlook for the economy has deteriorated. The U.S. Treasury formally accused Switzerland of manipulating their currency and added the country to the list of those it suspects of orchestrating the devaluation of their currencies against the dollar.

Central banks:

Federal Reserve (next meeting: January 27th)

During its last meeting of the year, the Federal Reserve, which left its monetary policy unchanged, reaffirmed its commitment to maintain a near-zero target until the recovery is complete, but added that its purchases of securities were now also linked to this target. The Beige Book showed “little or no growth” in four of the twelve US districts and only modest growth in the others over the past four years. The central bank lifted a six month ban on share buybacks and gave the US’s most profitable banks the green light to resume them for the first quarter of 2021.

European Central Bank (next meeting: January 21st)

The European Central Bank recalibrated its policy settings during its last meeting to ensure funding conditions for companies and households stay favorable throughout next year and into 2022. While keeping rates unchanged, the ECB increased the PEPP envelope by €500bn to €1.85tr and will conduct the purchases until the COVID crisis is over. Its first forecast for 2023 still has inflation below the target at 1.4%. The forecast for real GDP growth next year was revised down from 5.0% to 3.9%. The ECB has lifted its bank dividend ban but payout restrictions remain.

Bank of England (next meeting: February 4th)

The Bank o England kept monetary policy unchanged and left interest rates at 0.10%. The target for its asset purchasing programme remained stable at £895bn by the end of 2021. No comment has been made about the feasibility of introducing negative interest rates in the months to come. The central bank lifted its ban on shareholder distributions in the banking sector.

Swiss National Bank (next meeting: March 25th)

With headline inflation in negative territory every single month since the beginning of February, SNB keeps rate on hold at -0.75%, willing to intervene more strongly in the foreign exchange market to weaken the currency. The central bank lowered its 2021 inflation forecast from 0.1% to 0.0% due to the pandemic, keeping 2022 unchanged at 0.2%.

Market Issues:

  • After days of discussion both on the Brexit issue and US stimulus plan, December enjoyed two deals in four days, ensuring a smooth passage toward 2021. Indeed, markets fears were banished after the UK and EU agreed free-trade agreement for goods and US President Trump signed $900bn virus stimulus, averting a partial shutdown. Continued spreading of coronavirus’ cases on both sides of the Atlantic along with the appearance of a new Covid19 strain (VUI2020/12/01), the validation by the health authorities of Pfizer/BioNTech’s vaccine and the rollout of vaccines across the globe giving hope for a more stable life in 2021, new restrictions and lockdowns have all set the pace in capital markets. Adding to that, European leaders came to a compromise that allowed the coronavirus recovery plan to go through.
  • In December, core sovereign rates were rangy and spread compression continued with credit tighter on both rating spectrums. The most junior part of the capital structure, in both financials and non-financials, enjoyed decent total return with investors continuing to search for yield. Primary markets were less active ahead of the end of the year with poor liquidity in the second half of the month.
  • The prospect of an accommodative European central bank pushed peripheral spreads down across the Euro area, especially in Italy and Spain. Worth noting the strong buying of Asian investors hunting for yield. The Italian 5-year is now trading below 0%.
  • The US Dollar has continued to decrease over the month, ending the year close to its lowest level since April 2018. This US Dollar slide has propelled commodities higher across the board. Gold has risen by more than 25% per cent year to date, supported by the FED’s commitment to keep the stimulus coming. Oil continued to rally. From January 2021, OPEP+ group has decided to voluntarily adjust their production by 0.5 million barrels per day. The best known of the crypto currencies, i.e. bitcoin, crossed 20,000 dollars for the first time and skyrocketed to print a 281% increase year to date
  • In emerging markets, fixed income indices closed the year with decent total returns. On the macroeconomic front, China has continued to print positive figures as the latest Manufacturing PMI came in above expectations at 54. China’s Foreign reserves jumped to $3,178bn in November from $3,128bn in October (consensus $3,150bn). It is worth highlighting the deteriorating diplomatic relations with its key trading partner, namely Australia. As other central banks have cut rates this year, Turkey has raised interest rates for a second month in row as the new governor Naci Agbal is trying to rebuild the central bank’s credibility. The main rate is establishing itself at 17%, its highest level in more than a year.
  • New tensions between China and the US could emerge as the US is about to impose new sanctions against a dozen Chinese Communist Party (CCP) members

Credit Markets:

  • Moody’s cut Telecom Italia to Ba2 on their “more aggressive financial policy”.
  • French supermarket Casino priced EUR400mn in 5-year Non Call 2 bonds, with a coupon of 6.625%.
  • In Latin America, the Mexican government cut gas supplies to Braskem Indesa SAPI’s petrochemical complex, forcing its closure. Mexican state oil giant Petroleos Mexicanos (Pemex) could sink deeper into junk territory if Mexico’s under-pressure sovereign credit rating is downgraded, ratings agency Moody’s Investors Service said
  • BP priced a 20-year benchmark, the first offered via a Dutch entity, which make bonds eligible for the ECB’s purchasing programme
  • Credit Suisse cut 10% of its staff in its asset management business this year, a unit that has been hit by fund implosions in the wake of the pandemic. The Swiss bank said 4Q investment bank revenues are ahead of 4Q19, both in USD and CHF terms
  • Société Générale and Credit du Nord announced they will merge their retail networks, a project that will lead to the closure of 600 branches.
  • Moody’s said that European banks’ outlook is negative for 2021 as they face a challenging business climate (slow economic growth, weakened profitability prospects, rising non-performing loans).
  • AstraZeneca has been affirmed at BBB+ by S&P. Its rating was placed on watch positive from outlook positive

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