This week we published a number of flagship publications. First, we examine the economic outlook in the The Big Picture – Darkest before dawn, 1 December. In our view, the continued high levels of COVID-19 cases means restrictions are likely to remain through to early spring. Following the strong recovery we saw in Q3, we believe the global economy is likely to see a soft patch in Q4 20 and Q1 21 due to new restrictions and delays in new fiscal stimulus in the US. However, as a vaccine is for distribution widely in H1 21, we see brightening prospects for the global economy taking hold in Q2 and strengthening further in Q3 as pent-up demand is released. Overall, we look for a smaller effect of fiscal and monetary stimulus in 2021 than in 2020. The balance of risks to our global scenario has shifted to the upside due to the positive vaccine outlook, at the same time reducing negative tail-risks for the global economy. We also published FX Top Trades 2021 – Our guide on how to position for the year ahead, 3 December, and Danske Bank EUR and Scandi Fixed Income Top Trades 2021, 4 December.
Next week is set to see strong focus on the EU Council meeting on Thursday and Friday, where highest on the agenda are Hungary and Poland’s threat of a veto of Next Generation EU and Brexit negotiations. Regarding the NGEU, this week EU diplomats said the rift with Hungary and Poland on the NGEU budget and the rule of law is getting worse. Our baseline remains that they will find a solution (60%), as there are strong interests on both sides (countries need money and stability, not political chaos and market turbulence), however, we also acknowledge a risk of a delay to a solution. The adverse scenario of no solution has the potential to trigger a significant political crisis in the EU (see FX Strategy – EUR/USD, EU budget and recovery fund: standstill for now, 27 November).
On Thursday, the ECB is widely expected to announce a recalibration of its monetary policy instruments and the uncertainty is what tools it will use. Recent comments have focused on more Pandemic Emergency Purchase Programme (PEPP) and targeted longer term refinancing operations (TLTROs) as the main tools but we expect the ECB to tweak its more technical parameters, such as tiering and collateral rules, as well. We do not expect a material immediate market reaction to the recalibration (see more in ECB Preview – Recalibrating, not easing, 3 December).
Finally, Brexit is entering a ‘tunnel’, where it seems to us to be increasingly plausible that a deal is imminent. The media stories on Brexit focus mostly on the negotiations being in their final stage. We still believe a deal is more likely than not and that the days ahead of the EU summit on Thursday are extremely important for where things are heading.
Finally, OPEC+ agreed yesterday to raise oil production by 500,000bpd in January, which is about a quarter of the initially planned 1.9m bpd hike. In addition, OPEC+ plans to hold monthly consultations next year to discuss further adjustments. The response in oil prices was relatively muted, as the market was expecting OPEC+ to hold back on the initial planned production increase.
