Key events in developed markets next week

Equity markets have rallied hard on the growing expectations that Joe Biden has won the presidential election, but that he will be somewhat constrained by a Republican-controlled Senate. Such an outcome will still yield a decent-sized fiscal stimulus package, but Biden’s tax-raising and regulation setting agenda may be stifled.

We assume that Joe Biden’s lead will soon become unassailable, but there is the potential for lingering court challenges if Donald Trump doesn’t accept the result. Moreover, given the two Senate races in Georgia look set to go to January run-off we can’t yet rule out the possibility of a 'blue wave', with the Senate ending 50-50 Democrat/Republican should the Democrats manage to pick up both seats. Kamala Harris, as vice president, would then have the deciding vote. As such, the dust is yet to settle fully on the 2020 election and market sentiment could fluctuate significantly in coming days.

Data wise we have consumer price inflation, but given the economy remains substantially smaller than it was pre-Covid (around 3.5% down), we see little medium-term price pressures, especially with benign wage growth in an environment where there are still 10 million fewer Americans in work than there were in February. We will also get to see the preliminary reading of the University of Michigan sentiment index and it will be interesting to see if political uncertainty and surging Covid cases have dampened confidence.

We suspect it might and with Covid cases having soared above 100k per day the threat of renewed containment measures is high.

There is a sense that Brexit talks are edging nearer to an end-game - and certainly, time is running out if an agreement is going to be ratified before the end of the transition period.

According to the latest reports, the UK is keen to take talks to a higher political level, perhaps in a bid to trade-off some of the remaining contentious issues against one another. For the time being, Brussels is resisting this push, instead of looking for further concessions on the likes of level-playing field before unlocking the final political intervention.

With countries on both sides of the channel still likely to be under tight Covid-19 restrictions in January, the economic case for a deal to be done is clear. As ever though, the political challenges are more complex, and in particular, PM Johnson faces a tough task of convincing the more hardline eurosceptic MPs within his party to accept the compromises an agreement will entail.

The bottom line is that a deal is still the most likely outcome, but the end-game will involve some delicate political manoeuvring and there's still scope for things to go wrong.

Separately, we'll also get UK third-quarter GDP, which is likely to show a bumper growth figure on the back of the summer reopening process, as well as the return to schools in September. All of this is of course well out of date, and the return of lockdowns in England is likely to push November GDP lower by 6-7%, dragging the overall fourth-quarter figure into negative territory too.

For the Eurozone, next week will be about the bright spot of the economy at the moment: manufacturing.

Data on trade in goods and industrial production will probably show a recovery for September. With the service sector now contracting again, that would be a bit of relief although the fate of the manufacturing rebound for the new lockdown period is highly uncertain.

Besides that, some ECB speakers will be speaking next week, which should be interesting regarding their preferences for the options on the table for more stimulus.