Johnson in Brussels to try to save trade deal

The respective Brexit negotiating teams led by Lord Frost and Michel Barnier appear to have exhausted every avenue available to them to find a solution to the remaining issues that face the conclusion of a trade deal and the future relationship.

The outstanding issues remain unchanged: Fishing rights, the creation of a level playing field, and how disputes will be dealt with as the UK departs the European court system.

It was rumoured yesterday that the British delegation had agreed to soften the terms of the internal markets bill which will come into force if no deal is agreed and is considered by Brussels to contravene the agreement that is already in place.

It has been 1,629 days since the Brexit referendum decision set the UK on a path to depart the European Union and there have been several false dawns, but now every cliche that has been used such as eleventh hour, five to midnight, last chance saloon and now or never, is coming to fruition.

The EU Summit that will be held later this week was supposed to ratify any agreement that had been reached. Michel Barnier has said that the deadline for a deal is tomorrow and there will be no further negotiation after that point. The UK team have countered that they are prepared to continue to talk for as long as it takes.

The same outstanding issues have been holding up an agreement for a considerable amount of time, so it is difficult to see how, after two two-hour telephone conversations, face-to-face talks between Johnson and von der Leyen are going to solve the problems.

With the EU Commission President having to get a deal past all 28 EU members individually, the prospects for a compromise are unlikely to exist.

The UK will today become the first nation in the world to start vaccination against the Coronavirus Pandemic. The Pfizer/Biontech vaccine has to be stored at extremely low temperatures which has led to a change to its initial recipients.

It was expected to be available to care home residents first, but it is now going to be given to NHS front-line staff in hospitals which have the refrigeration facilities needed.

The pound is still riding a wave of positivity as the vaccination programme starts but that is now heavily tempered by fears of a no deal Brexit. Yesterday, it fell versus the dollar to a low of 1.3224 on a very volatile day but recovered to close at 1.3378.

With both sides confirming that a deal is preferable. There is still hope that the two leaders can come to some acceptable form of words, but they are each still calling on the other to understand the need for compromise, so it truly is coming down to the wire.

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No breakthrough in Congress may mean a double-dip

CEO’s of all sizes of business have called upon the U.S. Chambers of Commerce to increase lobbying for fresh stimulus to be agreed to stave off the threat of a second recession early in the New Year.

There is still no agreement about the size of the package that has been tentatively agreed but focus has now turned to its distribution and who will be entitled to receive assistance.

Democrats want blanket support for workers who have lost their jobs while the Republicans demand that it is more targeted, taking away the incentive for those who do not want to work to sit back and receive benefits.

Longer term facilities are also under discussion in addition to the pay check protection programme. Next year, small and medium businesses are going to need access to reliable funding to ensure that they are able to not only survive but grow as the economy recovers.

The Business Roundtable which represents larger businesses said at the weekend that 83% of its members see a stimulus package as the top priority facing the new Administration. While Biden is also singing from the same hymn book, political expediency may stand in his way.

Republicans are not going to help the new Administration overcome the hurdles that have been in place since July, despite the comforting words of outgoing Treasury Secretary Steve Mnuchin. At the FOMC meeting which takes place next week, the Committee may add to its own monetary policy arrangements, but it is clear that Jerome Powell believes that it is fiscal support that is still necessary.

Yesterday, the dollar index began the task of rebuilding following heavy losses last week. The weakening currency may have an effect on inflation pushing it higher but that has already been considered by the Fed which plans to amend its inflation target to be more flexible should prices begin to rise.

That is a slight concern to other FOMC members who believe that inflation could quickly get out of control leading to interest rate increases which would choke off the recovery. Barring any unforeseen issue, the Fed is not expected to raise interest rates until mid-2023 at the earliest, which gives a degree of comfort to markets.

The dollar index rose to a high of 91.23 yesterday, but the rise was unsustainable, and it fell back to close at 90.77.

Lagarde to take the euro lower?

The EU Commission and Parliament are in no mood to let the ECB off the hook for failing to satisfy one of its targets this year as inflation has fallen into negative territory.

The reason for the fall into deflation which has continued for several months have been based around the Pandemic, the volume of stimulus that has been injected (despite popular views), and the rising value of the currency.

When QE or the printing of money was first discussed it was felt it would lead to runaway inflation but in practice, due to a few tweaks, it has had the opposite effect.

The FX markets have taken on new ways of looking at risk versus value, with the dollar index being considered a measure of global risk appetite and its main ingredients being traded often as makeweights.

Despite the U.S. economy being shaky and not free from the risk of a double dip recession, that fear is almost certainly a reality in Europe, the euro continues to rally. That acceleration has continued as a usable vaccine has been created which improves risk appetite and the dollar index has plunged.

This week’s ECB General Council Meeting is expected to announce a major increase in the level of asset purchases it plans to undertake in the next year. President Christine Lagarde is also likely to try to start to talk the euro down to hopefully see inflation turn around in the coming months.

Brexit is still a millstone around the neck of the Eurozone. It appears to be moving inexorably towards a no deal conclusion but it is hard to say exactly what the outcome will be once the talking is over.

Lagarde will also call upon the EU Commission to unlock the current deadlock over the injection of further fiscal support.

In the meantime, the euro continues to be well supported on any dip. Yesterday, it fell to a low of 1.2078 but saw buying interest re-emerge at lower levels.