It’s Brexit crunch time again

It is hard to say how many times over the past eighteen months we have been told that it is crunch time for a deal to be agreed between the UK and EU to avoid the turmoil that would be created by a no deal Brexit.

It is therefore difficult to write that the negotiations really have reached crunch time and it is now or never since there are only six weeks to go until the transition period expires and the UK is set free or cast adrift depending on your view.

It is astonishing that London and Brussels are still calling on the other to make the necessary concessions to get a deal done.

There is still a degree of optimism that in the end both sides will see the error of their ways and come to terms over the remaining sticking points.

There has to be a framework agreed for how the two will deal with each other regarding state aid and it is down to London to compromise on that score. Equally, Brussels must be the one to accept that its rights to fish in UK territorial waters must be watered down (no pun intended).

With data still awaited that will tell just how effective the second lockdown will be in slowing the spread of the Covid-19 virus, there is a growing sense of pessimism over the lifting of restrictions in a couple of weeks’ time.

First, following what is happening in mainland Europe, it seems that restrictions will be in place longer there than originally intended since the rate of infection in most countries is not being controlled.

Furthermore, the UK Government yesterday commented that there was a degree of disappointment in data over the progress made in stemming the flow in any profound way during the period of tiered regional restrictions such that following the current lockdown, restrictions will need to be tighter than were seen then.

In the developed world, employment is becoming the common bellwether for the effect on economies of the Pandemic. In the UK, the rate of unemployment rose from 4.5% to 4.8% in the most recent data with a rise above 5% expected this month.

With most estimates expecting the UK to top-out around 8% there is still a great deal of suffering to come and it is ever more doubtful that Rishi Sunak’s extension of the furlough scheme until March can have a significant effect.

The pound reacted well to another positive release of data for a new vaccine yesterday as global risk appetite was buoyed. Against the dollar, it rose to a high of 1.3242 but was unable to cling to the 1.32 handle, closing at 1.3197.

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All areas of economy facing challenges

While Fed Chairman Jerome Powell continues to be the most important voice in the economic battle to stem the effect of Covid-19, several Regional Fed Presidents are supporting his overall view but also highlighting the situation in their particular region.

Whether it is simply an agreement that any disagreements about Fed policy remain within the FOMC and not aired in public or there is genuine harmony concerning overall monetary policy, the Fed compares very favourably with the ECB where it seems that there are several voices each with its own nationally driven agenda.

Yesterday data for manufacturing output in New York State was released which if repeated nationally would almost certainly mean a return to recession, or at least contraction in Q4.

With the Treasury now barely functioning following the election and Secretary Steve Mnuchin sharpening his CV, any hope of a replacement Bill for the support package that expired at the end of July being seen before year end is fading.

Powell made it abundantly clear in the runup to the election that without agreement between the Administration and Congress that the recovery would be blown off course and possibly derailed entirely.

There is no doubt that under the Biden Presidency, support will be provided but even if the question is not if but when, the urgency is growing in equal measure to the number of cases.

The dollar index remains locked in a narrow range driven primarily by risk appetite as investors try to find a safe haven while searching for yield.

Yesterday it traded between 92.84 and 92.46, closing at 92.56. Support is at 92.20 and 91.80 while sellers are lining up above 93 in the short term.

Concerns over rule of law restrictions drive disagreement

The vetoing of the EU’s next budget by Hungary and Poland depicts in stark relief the issues that Brussels is going to have in any attempt to create a more Federal Europe going forward.

The two nations both baulked at the condition that the disbursement of funds will be determined, among other things, by the rule of law. That is to say that Brussels can punish those nations that plough their own furrow by holding back funds.

Hungary has been well known for being particularly vocal about immigration policy while Poland has cited several reasons for its reticence in joining the single currency. Both nations are seen as vital as protectors of the bloc’s eastern borders, but their stand has brought stinging criticism from several quarters.

Europe’s Trade Commissioner called for a speedy settlement of the row, commenting that this was not something new since rule of law had been a cornerstone of the budget since talks began.

It is likely that the stance of the two nations was brought about by investigations being held into both countries for undermining the independence of the legal process.

While agreement over the budget is largely an administrative process it is the attached Eur 2 trillion Pandemic Support Package that needs to be sanctioned quickly. Ambassadors lumped the two together at a marathon four-day summit last July expecting that would ease its passing.

While that process only needed a majority to pass, the entire package requires unanimous support, and this is where the two former Eastern Bloc countries saw their chance to bring their influence to bear.

Yesterday’s release of the ECB’s Financial Stability review brought very little that markets were not already well aware of. The Pandemic has amplified existing vulnerabilities in the financial system. This is Brussels speak for; We know it’s happening, but it is impossible to solve given the structure of the Eurozone and Central Bank.

The phrase too big to fail was coined regarding several global financial institutions but in the current global crisis, it applies just as readily to the entire Eurozone.

Yesterday, the euro weakened marginally. It fell to a low of 1.1814 but rallied to close at 1.1852 as traders eagerness to take short positions was tested.