Sterling ends 2020 on front foot

With Brexit now completed, there has been a positive start to the movement of goods between the UK and EU from both sides of the country.

The New Year holiday has allowed freight businesses to ease themselves into the new methodology and so far, the reaction has been positive.

Given the concerns over what would happen in the event of a no deal scenario, the UK can look forward to its new trading relationship with Brussels with a degree of confidence.

Remain supporters can now be seen as having ideological rather than practical concerns although there is still time for problems to surface.

Prime Minister Johnson’s attention now has to be fully focussed on the Covid-19 Pandemic. Appearing on TV yesterday, he was in sombre mood facing up to the reality of another full lockdown as the number of new infections meets and passes those seen in the first wave of the Pandemic which may ultimately lead to an overwhelming of the NHS and a rising number of fatalities, if it is not reversed.

Today sees the rollout of the second newly approved vaccination.

The Oxford/AstraZeneca injection now carries the hopes of the nation that the tide of the Pandemic can be turned. Media outlets have latched onto comments by Johnson and his Health Minister that the jab will enable the Government and NHS to have the Pandemic under control by Easter which, this year, falls in early April.

Economically, Brexit will provide a boost to activity as long as businesses are able to come to terms with additional documentation which has now become necessary. Having wasted the transition period continuing to negotiate the terms of the UK’s departure, the time to become used to the new regulations was completely removed.

Any Brexit boost is likely to be severely diluted by the threat of a third national lockdown with large swathes of the country already under the most severe restrictions.

The pound has come close to running out of steam following the positive support it received following the Brexit agreement. It ended 2020 on its highs for the year, and while there has been little follow through, this week should set the tone for the next couple of months.

It closed 2020 at 1.3666 versus the dollar, just twenty pips for its high for the year.

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Countdown to inauguration begins

A story has emerged overnight on a phone call between Donald Trump and a Georgia electoral official in which Trump is heard to demand that the official find more votes.

The outcome of this could go either way. Since the majority of the country wants to move on from the election it may turn into a nothing story, although with outgoing Vice-President supporting several members of the Senate who wish to challenge Biden’s confirmation this week, it may just smooth the new President’s path a little.

Data for jobless claims in the U.S. fell marginally in the second last week of the year and the monthly employment report is due this Friday. Jobs are set to be the single most significant economic indicators as the country gears up for the inauguration of President-elect, Joe Biden.

The support package agreed just before the Holidays has been successfully distributed but claims that it is insufficient to continue to reverberate around Washington.

Last year, the dollar appeared to go through a complete sea-change in the factors that control its direction. The strength, or otherwise, of the economy appeared to become a contraindication for the currency and this led to several anomalies.

Looking at the market as we start 2021, these indicators would point to the U.S. facing a significant and longer-term recession, while the general feeling is that it can come through the year reaching a level of activity close to where it was pre-Pandemic.

The rollout and distribution of an effective vaccine will provide the U.S. with a major shove in the right direction. Difficulties in the distribution of the Pfizer vaccine may see the rollout be a little slower than had been hoped for but it is likely that the economy will start to see significant growth in H1.

This week’s data will be eagerly expected. The headline non-farm payrolls are expected to have fallen close to 100k new jobs from 245k in November. With the number of jobless still well above pre-Covid levels a major jobs creation package will be high on President Biden’s to-do list.

The dollar index closed 2020 at 89.93. It has recovered a little from its years’ low but still appears to be under pressure. That pressure is likely to remain while the market remains positive about the effect of global vaccination programmes.

Banks not placing support where it is needed

Mario Draghi, the former ECB President warned at the time of the release of the first package of support measures that the EU must be careful to use the funding wisely if it is to be able to leave a legacy for future generations.

Part of the cause of the 2008/9 financial crisis was the overloading of banks’ balance sheets with government debt and it looks as though they are gearing up for another fall.

Up until the end of the third quarter of last year, banks, overflowing with excess cash from Covid relief funds bought close to Eur 200 billion of their own country’s debt. That raised their combined exposure to close to Eur 1.25 trillion.

This has become an easy money trade for the banks as they take funds from the ECB and low rates and invest in what they again see as risk free purchases of Government dent, safe in the knowledge that the ECB will stay as a backstop.

That may not always be the case as they discovered in 2010

Possibly even more important than the risk element of this trade is the squandering of the opportunity to support their national economies as mentioned by Sr. Draghi.

That is a story for the rest of the year as the Eurozone strives for growth in the face of several headwinds. The EU won’t emerge from Brexit totally unscathed as it is hoped/expected.

Supply chains may be significantly damaged while the UK becomes free to buy goods that until last week arrived in the UK from Europe, from far wider afield.

The current lockdowns in several countries will remain in place for far longer than had been originally imagined. This will wreak havoc with the tourism and hospitality sectors, in several cases for the second year.

The relative strength of the euro will continue to concern the Central Bank. Its effect on inflation and the increasing cost of exports will have an adverse effect on the recovery. It ended last week at 1.2216 versus the dollar, having tried and failed to push above the 1.23 level.