Brexit and Vaccine drive sterling higher

Although talk of a vaccine to protect against Coronavirus becoming available before the end of the year has been going on for some time, the fact that it is now reasonably certain that it will happen has taken markets by surprise.

The Government, while being naturally cautious, must be incredibly relieved as it was reaching the point where the effect on the economy of further lockdowns would become almost impossible to support.

The boost to confidence of both business and consumers could be a game-changer according to Bank of England Chief Economist Andrew Haldane. It is clear that while the rollout of the vaccine will take several months, the news will provide a vision of a light at the end of the tunnel.

There was also relief created by the employment data which was also released yesterday. Although the unemployment rate rose to 4.8%, the claimant count fell from 40.2k in September to 29.8k in October.

Going forward, the extension of the Government’s furlough scheme until next March is expected to allow small and medium sized businesses to receive sufficient support that wholesale layoffs may not be necessary.

Having committed another £150 billion in QE at its meeting last week, the Bank’s strategy is being questioned. The long-term use of the printing of money has become part of the toolbox of Central banks since the financial crisis, but reliance upon it long-term could cause more harm than good as market expectations fall.

There were further rumours yesterday, as there have been for a few weeks now, of a breakthrough in Brexit negotiations. While these drove the pound a little higher, the only real positivity from talks recently is that there have been no leaks, which could be taken as a sign of progress.

Yesterday, the pound rose to a high of 1.3278 versus the dollar, closing at 1.3247.

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Fed’s actions allowing business to maintain staffing levels

There were several comments yesterday from regional Fed Presidents some of whom are current members of the FOMC confirming that they are determined to support the economy during what is expected to be a difficult winter politically, economically, and medically.

A number of States are seeing record high new infections from Covid-19 and while the Administration is virtually paralysed by the ongoing political standoff, a Pandemic Relief Bill is becoming more crucial almost daily.

The outgoing President, Donald Trump, continues to cling to what appears to be fading hope of legal challenges to the result in several States and the support he is receiving amounts to little more than sycophancy. Senior Republican figures including George W Bush, the only surviving Republican President are calling for him to concede.

Over the entire period of the Pandemic, the Fed has shown itself willing in both word and deed to provide as much support for the economy as it can. However, as Fed Chairman Jerome Powell has been keen to emphasise recently, help has to come in the form of both monetary and fiscal support. The Treasury and Congress are lagging behind since the previous support package expired.

Despite the country having plunged into a political crisis, the economic data released recently has painted a slightly different picture which could last long enough to see the country through until a new Administration is sworn in, provided the trend continues.

The U.S. has bucked the global trend in employment over the past couple of months, creating new jobs at a reasonably healthy rate. Around 1.25 million new jobs have been created since the start of Q4 and jobless claims data has been slowly falling.

While it is not the Fed’s preferred method of gauging inflation, this week’s consumer price data will allow the market to follow more closely the reasoning behind Powell’s recent comments regarding an adjustment to the Fed’s method of targeting prices. Core CPI is expected to start to creep up towards the current target of 2%, climbing from 1.7% to 1.8%.

Yesterday, the dollar index corrected its recent rise, falling to 92.60 and closing at 92.74. This is close to the bottom of its perceived medium-term range.

ZEW future expectations collapsing

The influential ZEW institute published its estimates for confidence in the German and Eurozone economies yesterday and they did not make pleasant reading.

In Germany, the current situation fell from -59.5 in October to -64.3 this month while future expectations also fell from 56.1 to 39. A similar picture was painted by the Eurozone data.

Italy had its worst death toll from Coronavirus since May on Monday as the entire region looks certain to be plunged into a further lockdown.

The news of the breakthrough in creation of a Covid-19 vaccine by a German company, Pfizer, did little to lift the gloom that is descending over the region. It is continuing to exhibit signs of neither the ability nor collective will to climb out of an ever-deepening economic hole.

ZEW commented that its analysts are concerned about the economic impact of the second wave of infection and what this will entail. Their report went on to say that the economic slowdown in Germany could see it slip back into recession.

The threat of mass unemployment is growing. 15% of Spanish workers are employed by businesses seen as at more than 50% at risk of not surviving the winter. It is a similar story in other States too where at risk means having high levels of debt and negative working capital.

It seems that the threat of this calamity, or that concern, has been growing for several months, yet in both Brussels and Frankfurt there appears to be either a calm serenity or a painful acceptance that the situation will get worse, possibly catastrophically so, before it improves.

This attitude brings into sharp focus the brinkmanship being exhibited by both slides in Brexit negotiations when a deal is becoming vital to both sides interests.

Yesterday, the euro fell to touch support at 1.1780 but recovered to close just four pips lower on the day at 1.1808.