The light is getting brighter
18th January: Highlights
- Recession beckons as economy shrinks by 2.8% in November
- Biden set to start in a rush
- Double dip for entire Eurozone now almost certain
Record vaccinations lead to sense of hope
The economy shrunk by 2.8% in November as the tier system was brought in and is likely to see a similar or even worse result in December as even more draconian measures were introduced.
The bad news has continued into the New Year with the travel and aviation sectors hit by the withdrawal of all travel corridors in the wake of new strains of the virus emanating first in South Africa, then in Brazil.
Analysts predict that every month of continuing lockdown adds three months to the time before activity in the UK returns to its pre-Covid level.
There is evidence that the first seeds of a slowdown in the infection rate are beginning to grow. Hospitals are still close to being overwhelmed but the peak may already have passed. The Government’s Chief Medical Officer sees the next week to ten days as critical while the Prime Minister, in the latest press conference, emphasized that the rollout of the vaccination must not lead to complacency.
The rollout of the vaccination programme is gaining pace with new facilities opening daily right across the country with around 3.75 million doses already administered.
After Brexit and Coronavirus, the financial community is going to have a new word to learn that is likely to dominate their lives.
Equivalence is the methodology of ensuring that, post-Brexit, financial services firms in the UK and EU are governed and inspected in the same way.
The UK granted equivalence to EU firms back in November but so far, Brussels has not followed suit since because it wants to know how UK rules will differ from theirs before it is granted.
It is suspected in Westminster that the delay is politically motivated with Brussels giving London a taste of its own medicine.
The contraction in the economy saw the pound end last week weaker. Over the week, it fell versus a slowly recovering dollar to a low of 1.3451, closing at 1.3583.
Given that Sterling remains in a range, it is difficult to say whether it is gathering strength for another test of resistance at 1.3720 or running out of steam and likely to fall back. Events this week In the U.S. are likely to provide a clue.
Dollar index starting to rally from lows
The race to impeach Trump while he is still in office may be largely symbolic, but it serves to ensure that there is no return as impeachment bars him from standing again.
The U.S. is gearing up to ensure that any protests from Trump supporters aimed at marring the inauguration will be contained.
The incoming President has already got to work on ensuring that his first 100 days will be productive with a $1.9 trillion of support and stimulus to be put before the house. He has also announced that he will sign around twelve executive orders on his first day in office across a wide range of topics such as education, student loans, Medicare, and housing.
Investors and analysts are recalibrating their portfolios based upon the effect of such a large package of measures and the possibility that the Fed will also increase its stimulus programme at its first meeting of 2021 which takes place next week.
With voting membership having changed, several new FOMC members have been having their say on their view on support and stimulus.
Neel Kashkari, the President of the Minneapolis Fed commented that the outlook remains mixed with stimulus measures and the vaccine rollout positive which are balanced by delays in getting sufficient quantities of the vaccine and reluctance on the part of the population to take part.
Boston Fed President Eric Rosengren commented that the package of measures to be introduced is big but appropriate and more may be needed going forward while vaccinations take hold.
Last week, the data releases were generally supportive for the dollar with industrial production rising in December by 1.6% versus a rise of 0.5% in November. The black mark was provided by data for jobless claims which reinforced the need for Biden’s plan.
The dollar index had a good week, rising to a high of 90.77 and closing at that level.
The EU in need of massive stimulus
The markets could be forgiven for believing that the delay in delivering both a series of measures to provide economic support and a seven-year budget is deliberate as a method of controlling spending.
While that is unlikely, the situation remains grave for several countries whose Government spending and debt to GDP ratios are spiralling as debt levels soar.
There is gouging to be some serious management required from the EU commission if the situation is not to lead to significant permanent changes to the economy and even the makeup of the Union.
The economy is not likely to suffer a further significant blow from Coronavirus going furrowed although there are delays being experienced over the delivery of the vaccine. The numbers of jabs being given is well below that of the UK where both delivery and vaccination have got over the issues being faced by Brussels.
The dominance of Germany over most aspects of life in the Union is likely to diminish over the next couple of years following the departure of Angela Merkel as Chancellor. She has been a prominent and dominant character over virtually the entire life of the EU in its current format.
Few can even remember who preceded her as Chancellor and she will be a hard, almost impossible, act to follow.
Last week’s data releases added to the theory of a long and painful recovery.
Investor confidence rose marginally. This is mostly due to the beginning of the vaccination programme. Meanwhile, industrial production remains in negative territory month by month, although the Fall in November was not as bad as October.
The euro looks like it has seen its medium term high. Last week, it fell versus the dollar to a low of 1.2076, closing at 1.2078.
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.”