Rays of light in Europe

Danske Research Team Danske Bank A/S

While Europe is seeing rays of light in getting the second COVID-19 wave under control, the situation in US is worsening fast. Many European countries now see a turnaround in new infections and this week France joined the club with a big decline in new cases. Italy is finally showing signs of stabilisation but the level of new cases is still high and pressure on hospitals significant. In the US, there is an acceleration in new infections and record-high hospitalisation rates. More and more states are tightening restrictions and more are likely to follow suit in our view.

The new waves of the virus have so far takentheirtoll on the European economy. This week’s euro area PMI and the German ifosurvey revealed that business confidence in the service sector in Europe has fallen, as restrictions are especially targeting bars and restaurantsand the retail sector. In contrast,European manufacturers overall continue to buck the negative trend, also visiblein stable export expectations. Both manufacturing and service companies remain optimistic that the crisis will fade with the prospects of a roll-out ofvaccinationsearly next year according to news from pharmaceutical companies.

The US economy so faris holding up despite escalating virus infections and new restrictions.November PMIs for services continued higher (57.7 from 56.9) along with manufacturing (56.7 from 53.4). The most upbeat parts were job creation and orders, with the order to inventory-ratio at 2018-highs.Next week the US ISM(Tuesday)should either be unchanged or slightly downbased on the PMIs released this week. Also watch out for the jobs report on Friday.In China we get the official PMIs on Monday and the private measure on Tuesdaywith both measures expected to beholding up quite well despite early signs of withdrawalofmonetary easing.

On the political front, the Trump administration finally gave the green light to let Biden begin his preparation for his administration. At the same time, Biden unveiled some of his picks for his upcoming administration withformer Fed chair Janet Yellen as the most prominent name as treasury secretary. Yellen is seen as supportive for a more lax fiscal policy stance, promptingapositive reactionin marketsand a steeperyieldcurve. In order to have a large fiscal easing in the US, the Democratswill probably have towin the run-off Senate election in Georgia on 5 January, which will give them a majority in the US Senate.

Mixed news this week suggeststhat a Brexit deal breakthrough is still not imminent. While this week was important, a dealmay not be finalised until next week. Our base case remains a deal but we will be more concerned if there is no deal next week either. The EU summit on 10-11 December seems like the last meeting where EU leaders can approve a deal, so both the EU and the UK have only very limited time to make up their minds.

The combination of positive vaccine news, favourableUSeconomicdata and more political certaintyin the USpropelled riskmarkets higherthis week. Equity markets hit a record high. Oil prices alsorallied with the price on Brent crude rising above US48/bbl –the highest level since early March. Oil prices have found support from growing demand optimism on the back of positive vaccine news in addition to support from a gradual decline in broad USD.

Download The Full Weekly Focus

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.