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On the agenda this week – we explain why we foresee a Santa Claus rally, look at the ‘Covid cluster’ in German-speaking Europe, and how Boris Johnson avoided making a huge political mistake that could have been blamed for cancelling Christmas in the UK.
The global economic recovery has accelerated, despite all the problems of supply shortages and surging energy bills. And it’s been led by the US, with the Atlanta Federal Reserve’s GDP Nowcast – a measure of overall economic activity in the US – soaring to 8.2% annualised. Back in September it had slowed to a crawl – one of the reasons I warned back then of a 5 to 10% correction in the S&P 500. We just about managed 5.3% intra-day.
Better growth means better corporate earnings and we can see this in the Bloomberg outlook index. The number zig zags around but I like this indicator because it measures when companies say that analysts’ forecasts are too low (and vice versa). Companies have better information about their earnings than analysts, of course, especially in the times of Covid. Pre-Covid, the average was 40, reflecting the fact that analysts are systematically biased in their forecasts. As the dramatic post-pandemic recovery took hold, the numbers jumped and supported the equity market. When the US economy slowed in September, it fell to the mid 40s but it has recovered – the latest 20-day moving average is 60 and rising.
We see further strength in the months ahead. Backlogs are beginning to ease in many areas, the jump in Korean exports in November partly reflects the end of the October holiday season but that will still ease backlogs in the rest of the world and follows similar strength in Chinese exports. The logjam of ships waiting to unload at US west coast ports is also easing. As the Christmas rush recedes companies will be able to rebuild inventories, which are at critically low levels – we’ve all seen the empty shelves in the shops. Consumers still have unspent ‘Covid piggy banks’. And capital expenditure is also booming. Yes, interest rates are set to rise in the UK and US, but only slowly (too slow in my view but that’s another story) and equities typically shrug off rising interest rates when the economy is growing.
Part of the explanation is that there is lower natural immunity there because they observed their strict lockdowns better. Spain and Italy are not suffering. I also think the Oktoberfest could have contributed. Yes, the official event was cancelled, but many drinkers crowded into local breweries – mini super spreader events indeed. All eyes are on Germany, where Covid hospitalisations per million have doubled since the Oktoberfest, the rise has been more than fourfold in the Netherlands.
One way or another, Northern Europe will have a nervous few weeks but the impact on economic activity should not be overstated, rather it’s the contrast with the US and the UK that explains the euro’s weakness.
Boris reluctant to trigger Article 16 until new year
And why might Boris save Christmas? The UK government had been planning to trigger Article 16 to suspend the Northern Ireland protocol later this week. The EU would retaliate by threatening to tear up the free trade agreement with the UK and possibly disrupt trade in the run up to Christmas. Having capitulated to pressure from British turkey farmers and allowed temporary visas to be granted to workers from the EU, Boris seems to have also decided to leave triggering Article 16 until the new year. After all, he’s not exactly riding a wave of popularity at present.
Boris Johnson avoided a big blunder last week by deciding not to trigger Article 16, which would scrap the Northern Ireland protocol. The plan was to give one month’s notice so that it would be on the agenda at the European Council meeting in December. But Europe would probably have retaliated by giving notice that the Trade and Cooperation Agreement was being scrapped. That would be 6-12 months’ notice but the French might also tighten checks immediately at Calais and, whether justified or not, any shortages of Christmas goodies from Europe would have been blamed on Boris. The UK might still trigger Article 16 in the new year, the Northern Ireland protocol is ridiculously restrictive in my view, but the UK could be better off accepting the EU’s offer to ease the checks.
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Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
