London placed in tier three from Wednesday

The talks over a post-Brexit trade deal continue against a background of new tighter health restrictions across the whole of Europe.

In the UK, Health Minister Matt Hancock announced that despite the review of the new tiering system not being due until Wednesday, the decision has been taken to place London and large parts of the Home Counties into the highest tier with effect from midnight on Wednesday.

This will have the effect of closing all hospitality for the foreseeable future and is a major blow to the economy.

Hancock went on to say that a mutation of the virus had been detected in the UK and several areas of the continent, but it was unclear if this had led to the spikes that were being experienced in the South East of the country. He reassured MPs by saying that the mutation was likely to respond to the vaccines that have been produced.

Announcing the addition of London to the areas in tier three means that close to half the population is now subject to the most severe restrictions.

The Prime Minister is still heavily involved in Brexit negotiations despite his Chief Negotiator taking the lead.

There have been several differing interpretations of how the talks are progressing, that has led to both confusion and volatility in the financial markets.

Apparently, according to Michel Barnier, fishing rights are the only remaining hurdle, while the UK contingent have said that there are still issues over the level playing field.

Until we see Boris Johnson and Ursula von der Leyen on a platform saluting a historic agreement, there will continue to be doubts that the deal can cross the finish line.

With the London Lockdown and continued fears over Brexit the pound has been volatile in a relatively small range. Yesterday, it traded between 1.3445 and 1.3225 versus the dollar, closing at 1.3321.

Today’s unemployment data is likely to add pressure to the pound with the unemployment rate expected to climb above 5%.

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Fiscal support becoming vital

There remains a massive chasm between the amount of support being provided to the economy by monetary policy compared to progress being made in Congress over fiscal support.

With the final Fed meeting of 2020 taking place today and tomorrow the economy has been placed in something approaching a stalemate.

It is becoming more certain that Congress is unlikely to present a workable package of support measures before the end of the year and that could lead to a delay until post-inauguration.

There is little doubt that Jerome Powell will present an upbeat message tomorrow evening at his press conference although he is likely to press Congress for more support.

Powell will provide advance guidance of the Fed’s intentions and any mention of inflation will confirm that prices are well under control but even if they start to rise, interest rates will remain supportive.

The Fed’s economic forecasts will accompany Powell’s comments and the jury is definitely out on what they will predict for Q4 and Q1

The Redbook released later today is likely to point towards a year on year rise in retail sales while in the short term, the rise of Covid-19 cases will lead to a fall.

Industrial production is expected to continue its recent rise, but the size of the increase will continue to shrink.

Employment remains the most significant driver of the recovery and the Fed will express concern over the recent falls in short term indicators. The most recent NFP data was more than disappointing and Powell will address his concerns that a package of measures to support business has not been forthcoming.

The dollar index remains mixed but appears to have halted its recent precipitous falls. Yesterday, it traded between 90.89 and 90.42. It closed at 90.68. It requires a close above 91.20 to confirm a low has been created.

Merkel apologises but acts tough

The single currency is in turmoil.

Not the kind of turmoil that leads to a fall in inflation that attracts the attention of the Central Bank or the kind that is driven by a collapsing economy.

The turmoil is driven by the uncertainty being generated by the introduction of a vaccine which will slow new cases of Coronavirus and the near panic created by Germany’s decision to go into total lockdown from this week until January 10th, with a review on January 5th.

It is interesting to note that the German lockdown will have a far greater social effect than economic.

While the Christmas Holiday in Germany only really lasts from December 24th until 26th, there is a general slowdown in both industry and manufacturing while services highlighted by the financial system close for a far longer period.

Despite that rather optimistic evaluation, the German lockdown, should it be repeated across the entire region is likely to be a major driver of another recession which is likely to last longer than the first.

France has come to the centre of negotiations over Brexit. A Frenchman vetoed the UK’s attempt to join and now a Frenchman is possibly going to veto the UK’s attempt to leave.

In the end, it could end up that Brussels’ choice will come down to supporting French fishermen or the overall post-Brexit relationship.

It has been said by the UK negotiating team that the often-touchy relationship between the UK and France is the major sticking point.

Were the fishing dispute to be driven by, say, the Dutch or Danish, it would be far more easily resolved, but a history of antipathy, with the UK accused of living in the past, remains.

The euro continues to be a makeweight in dollar index trades, affected by Brexit talks and concerns over the prospect of an approaching lockdown.

Yesterday, it traded between 1.2176 and 1.2115, closing at 1.2145.