Brexit to vie with Pandemic on economic cost

With the Government in a lockdown induced state of limbo as it awaits an expected fall in cases, Brexit is set to become the dominant factor driving the financial markets.

The negotiation period is definitely coming to an end despite there having been calls from several places for the transition period, due to end at the end of next month, to be extended.

As things stand, no matter what is or is not agreed in the coming days/weeks, implementation is going to have to be done in real time.

The ECB has warned that banks who wish to operate in the EU must not use the Pandemic as an excuse to drag their heels over the transfer of staff expertise from London to the major European Financial centres of Paris and Frankfurt.

This is already part of the agreement and illustrates the difficulties of implementing already agreed undertakings let alone the current sticking points.

Both sides have been tight-lipped over the most recent discussions, but it is rumoured that France has backed off from its demands over fishing rights. If that is true it should be relatively easy to agree a form of words to satisfy both Brussels and London over competition and state support since both sides agree in principle.

Yesterday, the Government was forced to confirm that it is looking into how to allow contact over the Holiday period between families no matter what arrangements are put in place following the end of the current lockdown on December 2nd. There are major concerns being expressed by the scientific community of the risk of such a move, but the social and economic benefits could carry the day.

Inflation data was released yesterday with year on year price increases ticking up from 0.5% in September to 0.7% in October. The Bank of England is especially interested in the rate of inflation as it considered a move to negative rates.

The cost of Brexit is in danger of being ignored as the Chancellor grapples with funding the Coronavirus Pandemic This could see the current strength of Sterling be short-lived in the medium-term.

The pound continues to appear ready to break higher for now as risk appetite improves and the market starts to turn bullish.

Against the dollar it reached a high yesterday of 1.3312, closing at 1.3268.

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Two further support packages about to expire

The rising number of cases of Covid-19 across almost the entire country is being left to State Legislatures to deal with since there is little support coming from the Federal Government. Most plans and strategies that were put in place at the time of the first wave of the virus are either now severely outdated or have expired.

With the wrangling over the election having apparently reached an impasse and President Trump seeming to soften his stance over challenges to the process in several States, there is growing concern that the Pandemic is close to becoming out of control.

There have been several indicators recently of a slowdown in activity with yesterday’s data showing monthly housing starts data falling from 6.9% in September to 4.6% in October.

Should today’s release of weekly jobless claims data fail to see a continued improvement, the Fed is likely to become more likely to act to keep the recovery going.

Two more less significant schemes to help those suffering from the Pandemic are due to expire this month and Congress appears to be no closer to finding an overall Support Package.

The President of the New York Fed. John Williams commented yesterday that the loss of Federal Support will hamper the recovery more and more in a relatively short period of time.

He went on to say that he is optimistic about the development of vaccines but sees a support package as a necessary bridge until they are available.

Several analysts have commented that rising risk appetite is seeing the dollar index lose ground. I prefer to believe it is concern that the recovery is going to slow considerably in the current quarter although a contraction of GDP is not likely.

Yesterday, the dollar index fell to a low of 92.21 and closed at 92.40. There is a degree of support around 92.20 but it is doubtful that it will hold should concerted selling take place.

Forecasts for recovery turning far more bearish

It is becoming more and more likely that the lockdown in several of the larger EU economies is going to have to be extended as they have not yet had the desired effect.

In Germany, the Economy Minister said yesterday that every effort is being made to ensure that the retail sector reopens in time for the Holidays.

The IMF issued a report that it sees German economic activity slowing considerably due to the current lockdown., It is fair to say that that message can be copied to every country currently restricting activity in the region.

It said that the German economy is likely to shrink by around 5.5% in 2020 and a recovery in 2021 could be tepid at best.

ECB President Christine Lagarde commented in an interview yesterday that she didn’t see the advances in the production of a vaccine to be a major game-changer, since the Central Bank had already considered this development in its baseline for H1 2021.

She went on to say that the ECB’s economic forecasts are being revisited and would be released at the meeting on December 10th. She also voiced a note of caution that the preparedness of the region for the second wave had been a little slow since it arrived sooner than had been expected.

EU officials are starting to voice opinions over Brexit which is a new phenomenon since negotiations had largely been left to Michel Barnier, at least publicly.

There will be a briefing of the latest developments tomorrow, but this could be cancelled unless a breakthrough appears imminent. It seems that there is a greater degree of realism in London than Brussels currently with EU Trade Commissioner Valdis Dombrovskis continuing to make unrealistic demands.

The euro is also threatening to break higher, much to the concern of the ECB, as the dollar continues to suffer. Yesterday, it rallied to a high of 1.1891, closing at 1.1852. There is a degree of resistance building between 1.1980 and 1.1920 which looks fairly strong for now.