Beyond Bulls & Bears


Notes from the Trading Desk—Europe

The Digest

European equities closed last week down 1% as the recent rotation into cyclicals/value paused for breath and saw defensives in favour. Much of the move lower came last Friday as fears of a no-deal Brexit became very real. Banks were the underperformers last week, down 6.15% on the factor rotation unwind, likely hurt further by the lack of update on the European dividend ban. There was also a more subdued economic outlook update from the European Central Bank (ECB) and their policy update was supportive in light of this, although largely in line with expectations.

Automobiles also underperformed, down 2.6%, but this comes after the sector clawed back from the March lows; it will be interesting to see if this signals a peak, or consolidation ahead of another move higher. All three major US indices were also lower, with the S&P 500 Index declining as attention focused on rising COVID-19 cases and the bi-partisan stimulus package. Equity markets in the Asia Pacific (APAC) region were mixed, with Hong Kong and mainland China the underperformers and South Korea outperforming.

Brexit Update

Another trading week finished without any Brexit resolution and a no-deal situation looking more probable. UK sterling and domestic stocks were weaker on the back of this. The domestically exposed JP Morgan ‘Brexit Basket’ closed down 5.7% on the week, whilst the FTSE 250 Index was down 2.8%.1 The exporter-heavy FTSE 100 Index closed last week flat. This divergence at an index level can also be seen when we look at the relationship between sterling performance and UK sectors.

Towards the end of last week, both UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen warned that a deal is looking less likely. Von der Leyen said at the European Union (EU) summit that no-deal was the most likely option, whilst Johnson also said that this outcome was ‘very, very likely’ and that the United Kingdom would ‘come out on World Trade terms’, alluding to an Australian-style relationship.

The weekend had been touted as the final deadline for deciding whether a deal would be possible. But after a call between the leaders on Sunday, it was agreed that negotiators in Brussels should continue to determine whether an agreement can actually be reached. In a joint statement, Johnson and von der Leyen said that it was ‘responsible at this point to go the extra mile’. There was no colour on how long these latest talks will continue, but the ultimate deadline is the 31 December. Time must also be allowed for both UK and EU parliaments to vote on any deal.

Markets are showing some relief that a no-deal didn’t materialize yesterday, as European equities were higher across the board and sterling clawed back Friday’s losses. The JP Morgan Brexit Basket is up 2.6% at the start of this week and there was a positive headline with comments from Michel Bernier, EU chief negotiator, that a compromise on fisheries could see a reached this week (but of course we have heard a lot of posturing like this in the past). We can clearly expect a volatile week for UK sterling and domestic stocks.

In the event of a no-deal scenario, some observers see sterling falling as much as 5% and the FTSE 250 Index could fall as much as 10%. The big UK banks could also plunge with potential for the Bank of England (BoE) to install negative interest rates.2 There were press reports that supermarkets have begun to stockpile basic items such as pasta, flour and tinned goods in order to support demand from the 1 January should a no-deal materialise.

Bank Dividends

There was some progress last week on the continuing pressure to end the dividend ban on UK banks. Last Thursday, the Prudential Regulation Authority (PRA) announced that UK banks were allowed to restart dividends (with caps for 2020) and buybacks. There were restrictions in place already, with distributions limited to a percentage of quarterly profits post certain adjustments and distributions. Further policy normalisation is expected post a 2021 stress test. Despite this, the UK banks were lower at the end of last week as fears over a hard Brexit dominated and as the restrictions on the dividends were digested.

There was no discussion of European bank dividends as part of last week’s ECB meeting, but the move from the United Kingdom could pressure on European authorities to do the same. This morning there were reports that European regulators are currently finalising recommendations which will permit the strongest banks to restart dividend payments. There will be certain conditions under which payments can resume, with these restrictions expected to be stricter than those enforced by the Bank of England.

The European Systemic Risk Board (ESRB) will meet on 15 December, so we can expect more clarity then. European bank stocks were higher  at the start of this week on the back of the news, but this does come following a significant underperformance last week. We think there is potential for some downside ahead, depending on just how strict the restrictions are.

Week in Review


European equities were lower across the board, with the STOXX Europe 600 Index pulling back for the first time in six weeks as the backdrop of Brexit and COVID-19 weighed on sentiment. We saw a reversal of factor rotation, which in turn saw the IBEX underperform, closing the week down more than 3%. The FTSE 100 Index fared better, down only slightly as weaker sterling supported exporters.

COVID-19 Update

Germany saw record COVID-19 numbers last Friday as the surge in cases continued. The country is now set to go into a hard lockdown starting this Wednesday until the new year. Non-essential shops will close, with workers and school children encouraged to remain at home.

In France, the number of COVID-19 patients in intensive care increased for the first time in nearly four weeks and hospitalisations also climbed by the most in three weeks. In contrast, deaths saw the smallest increase in seven weeks, but the picture still looks concerning and will put plans to enter a second phase of lockdown easing in jeopardy.

In the United Kingdom, experts in London have now said that it is inevitable that the capital will go into Tier Three in the next few days, calling the latest infection numbers ‘catastrophic’ as the rate of infection is now doubling every four days. Members of parliament that represent London boroughs and surrounding areas are set to be briefed on the latest figures today. On a positive note, the first vaccine was administered in the United Kingdom last week.


We heard from the ECB last Thursday at the conclusion of its policy meeting, and there were no major surprises, but also nothing to spook markets. The Pandemic Emergency Purchase Programme (PEPP) was boosted by €500billion (and extended to March 2022, with reinvestment to at least 2023. Preferential rates were extended to June 2022, with additional operations between June and December.

The extension of targeted longer-term refinancing operations (TLTRO) and raising of the magnitude of the facility (via an enlarged eligibility threshold) is supportive, but both were largely expected. There was also mention of ‘considerably more favourable terms’ for TLTROs, but not the rate explicitly.

The key message from the press conference was that favourable financing conditions must be preserved across all markets: banks, sovereigns and corporates (which essentially looks like yield curve control in all but name). The ECB promised to do whatever is needed to preserve monetary conditions, whether that means buying less than the envelope announced at €500 billion or adding to the total envelope. Market conditions will determine ‘whatever is needed’. The euro rose to a two-month high versus sterling last week (although sterling weakness on Brexit wobbles likely have a lot to do with the move).

On a positive note, the overhang of the EU budget impasse we have talked about recently has now been removed. Last week, leaders approved an historic US$2.2 trillion budget and stimulus package. Hungary and Poland backed down from their position, ending the ongoing dispute. Tighter emissions rules will feature as part of this budget, and on that note, environmental, social and corporate governance (ESG) had another record week, with global inflows to ESG equity funds of over US$9 billion, the highest number ever. Over past two weeks, almost 60% of global equity inflows went into ESG funds.3

United States

After making fresh highs early last week, it was not too surprising to see a bit of profit taking as the S&P 500 Index drifted a little lower into the end of the week. There was plenty for investors to focus on, with ongoing negotiations of a fiscal stimulus package, COVID-19 concerns and some notable initial public offerings (IPOs).

Looking at sector performance last week, there were no dramatic moves, with energy the best-performing sector, while financials and information technology lagged. Looking at factors, value outperformed, with energy holding up well and the Russell 2000 Index finishing up 1%.

In the United States, ongoing bipartisan talks on a fiscal stimulus package were a focal point. There was a great deal of headline noise last week, but a final deal remains elusive. A bipartisan group of lawmakers is reportedly set to unveil a US$908 billion coronavirus pandemic relief bill this week, although there’s no guarantee Congress will pass it

Last week saw a couple of notable IPOs, with both Doordash and Airbnb seeing remarkable debuts. Doordash gained 85% on its first day and Airbnb 113%.4 These debuts are reminiscent of the technology debuts during the dotcom era. There has been speculation as to how much retail demand drove these moves, given the boom in that space this year. It has been a record year for capital markets, with US$149 billion raised through IPOs in the United States this year.5

Last week the Food and Drug Administration (FDA) approved the Pfizer COVID-19 vaccine, which was a much-needed positive in a week that saw numbers of new cases and deaths continue to trend higher. The daily death toll has been rising sharply, with daily deaths over 3,000 on some days last week.

We did see some interesting research this weekend highlighting that a growing number of US citizens would agree to be vaccinated, which is encouraging for the rollout of the vaccination programme.6

Asia Pacific

Last week saw a mixed performance for Asian markets, with South Korea outperforming, Australia essentially flat on the week, and Japan, Hong Kong and Shanghai markets down.

South Korean equities continued their march higher, with the benchmark KOSPI now +90% from COVID-19 lows and +25% year-to date, as the economy continues its impressive recovery, led higher by technology heavyweights such as Samsung. South Korea’s nimble reaction to the COVID-19 crisis and the subsequent recovery is a stark contrast to the embattled European economies.

In China, there is a renewed focus on technology monopolies. Chinese equities did lag last week, but they have also done well post-COVID-19, with the MSCI China Index closing at all-time highs.

Elsewhere in the region, Hong Kong Chief Executive Carrie Lam announced that the city will return to tightest virus restrictions as cases spike.

Finally, there was encouraging data from China as freight rates reached new heights in December. This is encouraging and implies that the strong export performance seen the previous month will continue. (We would note that demand for shipping containers has surged recently.)

Week Ahead

Focus will remain on any read-through from any of our key themes from this week.

Monday 14 December

Data: Eurozone industrial production

Tuesday 15 December

Data: UK unemployment rate; France Consumer Prices Index (CPI); Italy CPI, trade balance

Wednesday 16 December

Data: UK CPI and Retail Prices Index (RPI); Italy industrial sales; Eurozone trade balance and labour costs

Thursday 17 December

Data: Eurozone car registrations, CPI; France manufacturing confidence; Spain labour costs

Monetary: Bank of England policy meeting

Friday 18 December

Data: UK consumer confidence; Germany PPI; Spain trade balance; Italy PPI

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1. Indices are unmanaged and one cannot directly invest in them. They do no include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. JP Morgan’s “Brexit Basket” tracks about 30 domestic UK stocks.

2. Source: The Guardian, ‘No-deal Brexit: markets brace for big hit to UK company shares and sterling’, 11 December, 2020.

3. Sources: EPFR Global, BofA European Equity Quant Strategy.

4.Past performance is not an indicator or a guarantee of future results.

5. Sources: Financial Times, Dealogic.

6. Sources: Pew Research Center, Gallup, Goldman Sachs Global Investment Research.

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