From a concern to a fear to an imponderable to reality?

The Office for Budget Responsibility, an independent body which oversees the fiscal and economic performance of the Government has expressed concerns over the additional effect on the country of a no deal Brexit.

Ursula von der Leyen and Boris Johnson clearly have the final say in what their Chief Negotiators do or don’t offer by way of concessions, but it is now becoming more and more likely that both sides are sleepwalking into no deal which is by far the least favourable outcome.

Last week, while presenting his spending review to Parliament, the Chancellor was at pains to impress just how serious the fallout from the Pandemic will be, it is unclear whether he has factored in the additional cost of trade between the UK and EU reverting to WTO rules from January.

The only possible benefit of that happening would be that businesses that trade with Europe and beyond will already have some experience of using WTO since the UK trades with 111 counties under those regulations.

Andrew Bailey, the Governor of the Bank of England has expressed his own concerns about a no deal Brexit. He commented recently that the fallout from such an outcome would create far greater longer-term issues for the economy.

The effect of the Pandemic has been more strongly felt in the UK with GDP contracting by more than 20% in Q2 due to the disproportionate split in activity between the manufacturing and services sectors. The Chancellor has said on many occasions that snapshots of the economy will always pout the UK in a poor light for this reason.

Last week, the pound continued to push against the upper reaches of its medium-term range. Versus the dollar, it reached a high of 1.3397 but was unable to sustain the rally and fell back to close just 22 pips higher at 1.3296. Against the euro, it failed to break major resistance at 1.1290 and fell back to end the week at 1.1116.

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Whisper it quietly, a double-dip is coming

The outlook for the U.S. economy continues to recede due to the increasing effect of the second wave of Coronavirus. This is leading to varying degrees of lockdown across the country.

President-elect Joe Biden is fairly clear in his strategy regarding the reaction to climbing infection rates, allowing individual States to formulate their own response with support from the Federal Government as some form of umbrella protection.

In contrast to President Trump’s reaction where every lockdown was taken as a personal affront, Biden seems to want to trust State Governors which bodes well for a more harmonious relationship than has been seen over the past four years.

In normal times, the election of a Democrat Administration would mean more individual support from the Federal Government but in an era which is far from normal, the passage of a support package will still require Biden to charm the opposition although the Fed and Treasury will form a more harmonious relationship.

The likely appointment of Janet Yellen as Treasury Secretary will bring a degree of calm reflection to the post which was not seen from Steve Mnuchin. Yellen will be able to relate to Jerome Powell’s considered approach and the two will form a significant duo.

Last week’s Thanksgiving celebrations and the start of the Holiday spending season were affected by Covid-19 reactions although it will be a few weeks before solid data is available, and evidence of the effect remains anecdotal.

Employment remains the most significant bellwether of the economy for the man in the street, since other data remains mixed. New claims for benefit rose again in the week to November 20th although continuing claims are yet to see the recent rises feed through.

This week’s release of the November employment report will, as usual, be eagerly awaited. The minutes of the most recent FOMC meeting showed that the Central Bank stands ready to act should there be a shift in the recent improvements that have been seen.

Last week, the dollar index continued to react to the news of usable vaccines being developed. It fell to a low of 91.75, closing at 91.80. This area contains significant support levels but in the current environment it is difficult to rely on technical analysis given the strength of sentiment.

Confidence more important than past data

There is a growing feeling that there is a storm brewing again over Government debt similar to what happened during and following the Financial Crisis of 2008.

Italy, as usual, looks likely to be the first cab off the rank, when it comes to demanding support.

Last week ECB President spoke of what is and isn’t allowed or even legal under EU regulation., While she was at pains to speak in general terms, she was clearly referring to growing fears that Italy will look to climb out from under its Eur 2.2 trillion of debt using methods that are both unusual and potentially catastrophic.

There are rumours circulating that since the ECB owns nearly the entirety of Italian issuance that it is going to demand that it is either written off or the maturity of the debt is made perpetual.

Italian Government Debt is currency just short of 135% of GDP and is in danger of becoming such a millstone around the neck of the country that it is hard to see how it can be serviced let alone repaid.

This week’s edition of the Spectator magazine comments that Italy is trying to magic away its Sovereign debt. This will bring unease in several nations although some, France is a good example, may also be heading down the same road financially and could see Italy as a test case. Lagarde labelled such a move illegal.

Within the EU, it has been the creditor nations headed by the Frugal Five that held the purse strings but any switch to the tail wagging the dog by debtor nations calling for debt to be perpetually shifted onto the books of the ECB could end in disaster.

Last week, the euro continued its assault on the summit of 1.20 versus the dollar. It reached a high of 1.1962, closing at 1.1960 as a sense of inevitability has grown in traders’ minds.