Equities closed the week lower, led by the real estate and financial sectors, as the recovery in employment growth appears to be stalling and as talks between Republicans and Democrats over another round of fiscal stimulus continue to drag on. A postponed stimulus package poses a headwind for stocks, as further economic restrictions from rising cases constrict growth. U.S. workers claiming unemployment insurance for the first-time exceeded consensus estimates. Positively, consumer sentiment posted a surprising increase in December amid prospects for a vaccine rollout. Concurrently, working from home and record-low mortgage rates have driven housing demand and created an additional $1 trillion in wealth for homeowners. Even as the economic momentum slows in the near term, analysts think the outlook for the economy is positive over the next year, though the road may be bumpy.
Major indexes reached fresh record highs last week before pulling back to finish modestly lower, as stalled Washington stimulus talks and the likelihood for a no-deal Brexit soured the mood. The market appears to be largely focused on the prospects of a brighter outlook driven by vaccine rollouts, even as recent coronavirus trends continue to worsen and restrictions in activity are reimposed. To this point, the S&P 500 has hit 30 new all-times highs in 2020, 17 of them recorded after the late-February pandemic-induced bear market, and four of them recorded the last two weeks. Is this remarkable strength justified considering the recent loss of momentum in economic data, or has complacency settled in?
Analysts contend that the answer is yes to both, with different implications based on time horizons. The pendulum of investor sentiment has clearly swung from fear of losses, to fear of missing out, and this could trigger near-term disappointments. However, what matters more for long-term investors, they say, is the prospect of the economy entering a new multiyear expansionary cycle that extends the bull market into the future.
Metals and Mining
The gold price ticked higher early in the week, climbing above US$1,850 per ounce for the first time since late November. But as the US dollar strengthened and vaccines began to be administered and shipped, the yellow metal faced volatility. Edging to a weekly high of US$1,872 on Tuesday, the metal shed 2.5 percent over the next 24 hours, but remained above the US$1,800 level to trade for US$1,825.
Gold climbed on Wednesday as a US coronavirus relief package continued to be delayed. The situation is becoming increasingly tense as many initial emergency aid programs are set to expire on December 26. On Friday gold was valued at US$1,837.01. After a steady uptick throughout November, December has added increased volatility to the silver price. The white metal started the first full week of the month trading at US$23.93 per ounce. A mid-week uptick sent the metal to a five day high of US$24.72. Holding above US$23, silver is on track for one of its best performances in seven years. Much of the white metal’s growth in 2020 is the result of the exchange-traded products (ETPs) space. As of mid-November, the silver ETP sector had recorded yearly inflows of 326 million ounces. The massive amount of buying pushed global ETP holdings to more than 1 billion ounces for the first time ever. Silver was priced at US$23.91 on Friday. Platinum and palladium also faced brief price dips this session. Platinum was trading for US$1,017 per ounce on Monday after surging to a year-to-date high of US$1,068 on December 4. Palladium fell to US$2,152 per ounce mid-week, its lowest point since early November. A day later, a 5 percent uptick sent the price to a four-week high. On Friday, platinum was selling for US$1,008 and palladium was at US$2,217.50.
Copper continues to trade near its seven year high, climbing as high as US$7,712 per tonne. As economic hopes add headwinds for safe haven assets, the positive outlook is propelling the base metals. Zinc was also on the up this week, adding 2.9 percent from Monday to end at US$2,810 per tonne. Nickel prices surpassed their previous year-to-date high to sell for US$16,807 per tonne. Since January, the metal has added 19 percent to its value. According to the International Nickel Study Group, global nickel demand is projected to come in at 2.52 million tonnes in 2021, up from 2.32 million tonnes this year. Nickel was moving for US$16,807 on Friday. Lead prices briefly rallied past US$2,100 per tonne this week before settling back just below that threshold. Lead ended the week valued at US$2,083.
Energy and Oil
Brent hit $50 per barrel on Thursday for the first time since March, edging higher on optimism surrounding vaccinations, the OPEC+ deal, plus strong demand in Asia. However, prices eased a bit on Friday as demand in Europe and the U.S. remains subdued and Covid-19 cases continue to spread. The EIA also reported a surge in crude inventories for last week, up 15.2 million barrels. There are signs of a demand rebound in Europe. Many European countries went back into lockdown in November but are loosening restrictions again. Bloomberg says that road usage is on the rise, hitting a two-month high. Pemex suspends work with Vitol. Pemex suspended business with Vitol after the oil trader paid $160 million to settle bribery charges. Vitol settled charges for paying bribes in Brazil, Mexico and Ecuador. The U.S SEC is set to vote on disclosures. The Securities and Exchange Commission will vote on December 16 on whether or not to approve new disclosure rules for oil, gas and mining companies related to payments to foreign governments. It is the third iteration of the rule and stems from the 2010 Dodd-Frank law.
Natural gas spot prices fell at most locations this week. The Henry Hub spot price fell from $2.70 per million British thermal units (MMBtu) last week to $2.45/MMBtu this week. At the New York Mercantile Exchange (Nymex), the price of the January 2021 contract decreased 34¢, from $2.780/MMBtu last week to $2.442/MMBtu this week. The price of the 12-month strip averaging January 2021 through December 2021 futures contracts declined 20¢/MMBtu to $2.576/MMBtu.
European shares fell on concerns about the rising numbers of coronavirus cases in key economies and uncertainty surrounding a post-Brexit trade deal and U.S. stimulus measures. In local currency terms, the pan-European STOXX Europe 600 Index ended the week about 1.00% lower, while Germany’s DAX Index fell 1.39%, France’s CAC 40 declined 1.81%, and Italy’s FTSE MIB tumbled 2.15%. The UK’s FTSE 100 Index was flat.
Core eurozone bond yields fell amid growing concerns about the possibility of a no-deal Brexit and another injection of stimulus by the European Central Bank (ECB), although optimism related to coronavirus vaccines and expectations of further U.S. fiscal stimulus moderated the overall fall. Peripheral eurozone bond yields broadly followed core markets. UK gilt yields also declined on receding hopes of a post-Brexit deal and Bank of England Governor Andrew Bailey hinting that the central bank could implement negative interest rates.
China equities fell on renewed tensions with the U.S. after a second major index provider removed some Chinese companies from its benchmarks following a Trump administration executive order. The large-cap CSI 300 Index sank 3.5%, its biggest weekly drop since September, and the Shanghai Composite Index shed 2.8%. Sentiment weakened after S&P Dow Jones Indices (S&P DJI) said it would remove 21 Chinese companies from its global stock and bond benchmarks after the U.S. Defense Department earlier this year designated the companies as having ties to China’s military. The move by S&P DJI followed a similar decision by FTSE Russell the previous week and comes as other index providers, including JP Morgan, MSCI, and Nasdaq, are deliberating whether to do the same.
The Week Ahead
Next week promises to be busy as a flurry of economic data will be released, including Housing Starts, Retail Sales growth, the Fed Funds Target Upper Bound, and Markit PMI breakdowns.
Key Topics to Watch
- Import price index
- Empire state index
- Industrial production
- Capacity utilization
- Retail sales
- Retail sales
- Markit manufacturing PMI
- Markit services PMI
- Business inventories
- NAHB home builders’ index
- Federal Reserve announcement
- Federal Reserve Chair Jerome Powell press conference
- Initial jobless claims
- Initial jobless claims (federal & state, NSA)
- Continuing jobless claims (regular state program, SA)
- Continuing jobless claims (federal & state, NSA)
- Housing starts Nov.
- Building permits Nov.
- Philly Fed index
- Current account deficit
- Leading economic indicators