10 November 2020: Vaccine success too early to judge

10 November 2020: Vaccine success too early to judge

Vaccine success too early to judge

10th November: Highlights

  • Biden’s Brexit unease could hit trade deal
  • Trump in a different world
  • Another Sovereign Debt Crisis looms

Johnson demands country continues to obey rules

Yesterday, the drugs firm Pfizer announced that they have developed a vaccine that they say is effective in 90% of cases of Coronavirus. This provided a boost to the financial markets with the shares in businesses involved in the most affected sectors making significant gains.

While excited by the news, Prime Minister Boris Johnson sounded a note of caution and told the country in a news conference yesterday afternoon that the basics of social distancing, hand washing and the wearing of masks should be maintained to stem the tide of infections.

Brexit trade talks resumed yesterday following the EU Commission President’s slightly negative comment over the weekend that the same issues still remain. Irish ex-Prime Minister Leo Varadkar said he believes that Joe Bidens’s victory in the U.S. election can give the talks a lift.

The effect of the one-month lockdown on the UK economy will take some weeks to be felt completely. In several sectors, this period is referred to as the golden quarter and removing 30% of the ability of the hospitality sector’s ability to operate at full capacity could have a major effect on its ability to continue any recovery.

Employment data will be released this morning with the claimant count expected to rise by 36k following a rise of 28k in September. This will see the unemployment rate rise to 4.8%. With the rate expected to peak between 8% and 10% as the recovery begins, it is obvious that the effects of the virus are far from over.

Unemployment will also be a major consideration for the Bank of England as it considers a move to negative interest rates. Deputy Governor Ben Broadbent warned about the effect on bank’s balance sheets yesterday. This could cause them to scale back lending at a crucial time, exacerbating the issue rather than helping solve it.

The pound continues to be affected by the outcome of the U.S. election as Trump begins his legal challenges. The lame duck President has been strangely reticent to speak in public, while he is continuing to receive calls to concede the result and bow out gracefully.

Sterling reached a high of 1.3208 versus the dollar but fell back to close virtually unchanged at 1.3160.

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Trump refuses to concede, continues to cite fraud

The U.S. election process has been laid bare for all to see over the past week with the full gamut of emotions on display.

Yesterday, President elect Biden got down to the business of establishing an office and holding discussions about Cabinet positions while creating a Coronavirus Task Force. President Trump remained holed up in the White House apparently still determined to challenge the election result in several States. This is clearly a situation that shows the U.S. constitution in a bad light and is something that will need to be addressed going forward.

Political commentators are almost resigned to this situation with their columns in the newspapers having an almost well, what did you expect? theme.

To a large extent, the markets are beginning to ignore Trump as irrelevant going forward which is as damaging to his ego as having lost to Sleepy Joe.

By far the most important issue facing the country economically is the passing of a Pandemic Relief Bill. The denuding of the savings of those affected going forward will be a long term issue but aside from that, the immediacy for those unable to fund their monthly outgoings could see the recovery falter and the country return to recession if not dealt with.

It is unclear what Trump’s plans are in this regard, but he is sure to face questions from Capitol Hill.

The Pfizer announcement sent the S&P to an all-time high that will be hard to maintain. The dollar index reacted to improving risk appetite by falling back. It reached a low of 92.13 but then rallied to a high of 92.96 before closing at 92.83.

Sovereign debt issues could tip balance into fiscal union

Providing solid foundations for the financial sector in the Eurozone should have been one of the most important outcomes from the financial crisis.

However, the EU Commission and ECB have allowed banks across the region to play with the numbers in their balance sheets avoiding short-term pain to create long-term stability.

Bank’s balance sheets are riddled with bad loans but amending accounting practice to allow them more time to shore up losses in the hope that another crisis wouldn’t hit has failed miserably and now threatens the very existence of the Eurozone and its common currency.

Even the more financially sound countries like Germany have issues over bad loans in their bank’s balance sheets. This was the most significant factor in Deutsche Bank’s withdrawal from global markets to concentrate on its core business.

Being forced into acting over an issue is often seen as being a recipe for disaster, particular when the opportunity to put things right in a considered manner has been eschewed.

Banks are expected to play a vital role in the recovery from the Pandemic but their ability to lend is now being severely curtailed by regulations put in place to protect the system.

With pandemic support reaching the limit agreed by the Heads of Government Summit, an increase will be necessary as countries may be forced out of the Eurozone as they begin to default.

The entire Eurozone could be faced with a situation where the wealthier countries are forced to sacrifice the pace of their own recovery in order to provide greater support. In essence it is a case of pay up or see the entire experiment fail.

With both France and Germany well into their respective lockdowns, the results will be seen in the coming weeks with the hope that they will allow businesses to reopen to ensure that the year ends in a more fruitful manner.

The euro is continuing to rally as the U.S. election result and the news of a vaccine buoyed markets. It hit a high of 1.1919 yesterday but fell back to close at 1.1812 as traders found themselves unable to justify continued strength and took profits on long positions.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”