Barnier claims proximity means deal must differ

To use boxing parlance, there is a great deal of trash talk taking place in the runup to the beginning of trade talks between the UK and EU following the phoney Brexit which took place on 31st January. Ask any man/woman in the street how Brexit has changed his or her life and it is likely you will be met by a blank stare.

In the original negotiations there was a lot of talk about various styles of trade deal with Norway and Canada the most prominent.

Norway appears to have been abandoned (subject to being reborn) and a Canada Style deal is heavily favoured by Boris Johnson and his Chief Negotiator, David Frost.

Unfortunately, Johnson and Frosts’ sentiments are not shared by Michel Barnier. It seems, for now, Ursula von der Leyen, the new European Commission President is acting presidential and staying out of the initial discussions.

In the so-called Canada style deal, 98% of tariffs have been removed and there has been a significant increase in Foreign Direct Investment (FDI) into Canada. However, since it is apparently not going to be a Canadian Style Agreement, the UK will need to reconsider its position. It is interesting to note that the reason Michel Barnier cannot accept such a deal is the UK’s proximity to Europe.

Rishi Sunak, the new Chancellor was allowed to announce that the budget is still going to be unveiled on March 11th. The markets are getting quite excited about the budget being far more expansionary than had originally been expected. Public sector spending is likely to increase as the end of austerity is finally confirmed by deeds over words.

The pound was in a decline before the budget announcement and turned around to reach a high 1.3049 and closing with a whisker of 1.30

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While virus remains a threat, the dollar rally will continue

The dollar has certainly hit the ground running in 2020. However, not all the positivity can be laid at the door of the economy, with risk appetite,. under severe pressure from the Coronavirus outbreak which originated in China leading the dollar higher.

There has been a great deal of supposed fake news around the risks associated with the virus. First, China accused the U.S. of inflating the potential seriousness of the ongoing epidemic while yesterday the papers were asking; what does China have to hide about its origin?

There is little doubt that there is a significant degree of resilience to the U.S. economy, but risk appetite is clearly playing a part since other safe-haven currencies like the JPY and CHF have also been gaining.

The market is awaiting the release of the FOMC minutes later today and it will be interesting just how much support there is for Chairman Powell’s steady as she goes monetary policy commitment.

The dollar has obviously benefited from the almost omni-directional path of the single currency this year. It has lost close to 4% of its value versus the dollar since the turn of the year, its worst performance in five years.

The dollar index rose to a high of 99.47 and closed just three ticks lower.

It will be interesting to see how the economies of the Eurozone and the U.S. react if the current path continues, with 100 the obvious target for the greenback and 1.0340, the 2017 low attracting the euro.

Data falls well below market expectations

Finally, we are seeing a certain degree of alignment between leading and retrospective indicators.

There was a period around the turn of the year and into January where it looked like the Eurozone was about to turn a corner. The consumer was almost buoyant while nearly every leading index of confidence and sentiment predicted that, if the downturn wasn’t necessarily over, then the bottom was in sight.

Sadly, there are only so many times one can expect an Xbox for Christmas and be satisfied with an orange and a promise of an Xbox next year.

Yesterday’s release of data from the influential Zentrum für Europäische Wirtschaftsforschung, ZEW to you and I, was not only well below market expectations but well below last month’s numbers.

The index reflects investor sentiment comparing the number of analysts who are optimistic or positive about the economic prospects, compared to those who are pessimistic or negative.

Last month, the index of economic sentiment for the entire Eurozone. was at 25.6 with an expectation this month for a rise to thirty. The data released earlier was an abysmal 10.

For Germany alone, the result was even more appalling. Against a previous read of 26.7 and a slightly lower expectation of 21.5 the actual number fell; to 8.6.

It has been a long time since a trade in the market was so obvious (despite sentiment) as the shorts that have been in place since the euro opened at 1.1210 on January 2nd. Yesterday, the euro continued a freefall through support levels, reaching a low of 1.0785, finally closing at 1.0802

It has been twelve trading sessions since the euro attempted a significant rally and that was mostly due to dollar weakness. Over those twelve sessions, there have been two up days. One opened at 1.0912 and closed at 1.0919, the other opened at 1.0831 and closed at 1.0833. The writing has been on the wall since New Year, written in nineteen languages!