Deal possible but not certain
16th November: Highlights
- Brexit clock ticking down
- Fed delaying the inevitable
- Loans crisis another major issue being ignored
Talks begin again as time runs out
Boris Johnson has entered a period of self-isolation as he has been in contact with an MP who started to show symptoms the next day.
This comes as the Government prepares a reset as Johnson’s two most senior advisors have left their posts following a week in which a power struggle exploded into the public domain.
The controversial figure of Dominic Cummings has left his post having said earlier in the week that it had always been his intention to leave the role at the end of the year.
Cummings has been a divisive figure ever since the news broke in the summer that he had broken lockdown rules. This undermined the entire process and several MPs now believe that their access to the Prime Minister will be improved allowing a more inclusive Government.
It has become apparent over the past month or so that both sides have realized that a trade deal between the UK and EU is in everyone’s best interests and, more importantly, that neither can expect perfection.
While that realization is yet to manifest itself in any concessions, there is a growing degree of optimism that this week could be vital, particularly as it is fast becoming a case of now or never.
This year was intended to allow for a transition period in which both sides got used to the new regulations, but instead it has brought confusion and concerns that come January, when the sabre rattling ends, all that will be left will be confusion and a logjam at Channel ports.
The news that a working vaccine has been developed gave the pound a boost last week as it continues its transition into a risk appetite driven currency. It rose to a high of 1.3313 against the dollar, closing at 1.3194.
The latest inflation data will be released this week with analysts considering a fall into deflation with prices falling. This will be of particular interest to the Bank of England which will not wish to see this continue given its negative effect on the economy.
Solvency crisis in bond markets a ticking bomb
Joe Biden’s credentials hardened last week (were that even considered necessary) with news that he won Georgia. This will have come as another barb for Trump as the Republicans had held that State since 1992.
The outgoing President issued a few cryptic tweets concerning who will be resident in the White House come January 20th, when the inauguration takes place, but currently shows no sign of calling in the movers.
Several Fed Presidents made comments last week which, while supporting Fed Chairman Jerome Powell, gave an insight into the variable economic situation around the country.
New York Fed President John Williams spoke of the economy’s positive trajectory, but also voiced concerns about the virus surge and the effect on the State which was one of the most severely affected in the first wave of infections.
There is a growing concern that the support offered by the Fed by pumping liquidity into the system is masking a picture of small and medium sized firms being unable to survive their debt levels and the volume of bankruptcies increasing exponentially.
One measure of this concern is the number of corporate bonds that have fallen below the rating that brings junk status. The label junk refers to the borrowers likelihood of being able to repay the bond when it becomes due. Junk status means that repayment is termed speculative.
Last week the dollar was volatile within its recent range as several drivers vied for control. The dollar index traded between 93.21 and 92.13 closing marginally higher at 92.74.
This week, the picture for the Presidency may become clearer but that is far from guaranteed. Data for retail sales and industrial production will be released tomorrow, with fears that the surge infections will see both turn negative, or least see significant downturns.
Later in the week, the markets’ focus will be back on employment as the recent improvement continues.
ECB following Fed in masking issue inadvertently
Similarly, to the U.S., corporate debt markets are pointing to a surge in insolvencies next year with the difference being that the Eurozone was already facing this issue prior to the Pandemic and is far less able to ride out the storm.
Defaults are expected to rise by close to five-fold in Italy with the more stable nations of France and, particularly, Germany, seeing insolvencies double.
This is the issue that prompts the frugal five to baulk at throwing good money after bad and threatening the very existence of the EU beyond a trading bloc.
Huge piles of non-performing loans are already threatening to destroy the Greek and Italian recoveries and a repeat of 2008 is becoming more and more likely. There is a greater need for growth that is being hampered by the second wave of Covid-19.
Italy has announced that it will extend its current regional measures into a full lockdown which will last beyond the current expiry date of December 3rd. Germany has said it is too early to gauge the effect of its own lockdown, adding that were the expiry date be this week, it would be impossible to lift restrictions.
These negative outcomes will need to be weighed against the economic and social effects of cancelling Christmas, with the euphoria over the development of a working virus fading as quickly as it was delivered.
Several members of the ECB’s Governing council spoke last week, and each voiced a note of caution against any form of optimism in the short term. Spanish Central Bank Governor de Cos commented that it is likely that the ECB will lower its expectations for output and growth in 2021 when it next releases data.
German spokesman Stefan Seibert spoke of the necessity that the ECB provides extraordinary support for as long as necessary.
Last week the euro again mirrored the dollar. It traded back up above 1.18, reaching 1.1919 but fell back to close at 1.1832.
A quiet week on the data front will be overshadowed by the numbers of new infections as individual nations continue their own lockdowns.
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.”