By the end of this week it seems likely that Brexit will be brought to its ultimate conclusion after 4 years of messy divorce negotiations come to a dramatic finale. With an unquestioned optimism over the UK and EU ultimately finding agreement, the markets were somewhat wrong footed as after a meeting between UK PM Boris Johnson and the European Commission’s Ursula Von Der Leyen in Brussels on Wednesday the tone of the leaders, that had been softening in the days prior to the meeting switched to that of no-deal being the likely outcome with differences too far apart for agreement. These fears were further underlined when Johnson spoke on Thursday night claiming no-deal would be the likely outcome and we should be ready. Naturally, this reversed the gains seen in the Pound versus the Dollar as market participants exited speculative longs ahead of the planned Sunday meeting between Johnson and Von Der Layen, where they will announce either agreement or the UK’s departure from the bloc with no trade deal in place.
After four years of negotiations it seems incredible that the UK now finds themselves in this position with heavy questions being asked about the PM and his ability to deliver what he promised to get into power. Of course, we cannot rule out the fact this week’s act isn’t from his playbook, making the EU see he's ready to walk away as a last roll of the dice to force concession from them. But that playbook certainly looks as tired and transparent. At the start of the whole process we highlighted that the EU were never going to give the UK a easy deal, this could encourage other countries to follow the trodden path and indeed this is exactly where we find ourselves.
With the outcome remaining unknown, after the announcement we can expect an explosive market open in Asia. With potential for moves of up to 5% either way in the currency. The UK FTSE will also be vulnerable after a strong few weeks of buoyant trading following the approval and rollout of the Covid-19 vaccine in the UK. Of course, it is not just the UK with vulnerabilities here, the Euro has avoided the worst of the volatility to date, but the UK is a major trading partner for the bloc and as such could see lessened but not insignificant volatilities. The EU did come through one battle this week with the 1.8 Trillion EU stimulus package finally being agreed as Poland and Hungary gave agreement. From a Central Bank perspective, we also saw Christine Lagarde’s European Central Bank increase its PEPP lending facility. She was probed in the post conference questions regarding the ECB’s view of the currency appreciation, with it being a known fact that these elevated levels are detrimental to European exports, nevertheless with professional aplomb she avoided committal to the question sighting they were “watching the level of the currency”.
It was another grave week for Covid cases across the western world with cases continuing to grow and that did start to weigh on the global stock markets across the US and Europe around the turn of the week. In the past weeks it seemed they were ignoring the near-term damage and focussing on the ultimate fix of the vaccines. But as numbers continue to grow as we head into the holidays and public mobilisation and mixing, there are grave concerns over a significant escalation into January and February next year. Stateside lockdowns are impacting significantly as is evident on the big increase in weekly unemployment, especially considering the fact there is no agreement in the stimulus package. The US/Sino tensions were heightened this week as Trump, undeterred by impending election defeat when likely confirmed by the Electoral College on Monday continues to act and enforce sanctions. Whilst the markets aren’t getting overly concerned by his actions believing Biden will likely reverse most, it does raise a concern. With the 26th December being the date a number of the previous aid packages and provisions expire, it's likely unless we see definitive action next week we could be headed towards a very volatile market in a period of extremely low liquidity, which can bring the most aggressive moves. Next week we hear from the Federal Reserve in the US, and considering the transitional status of the Presidency, we expect Jerome Powell to underline the support via lending houses, but call on the government to deliver on the fiscal measures.
The Week Ahead:
Monday - With data light on the day all eyes will be on the developments with Brexit. The only notable data comes early in Asia with the UK Rightmove House Price Index followed by Eurozone Industrial Production.
Tuesday - A busy day starts with Chinese Industrial Production, Retail Sales and Unemployment Data. The UK data comes with Average Earnings and Unemployment numbers. From Europe we get French CPI and Italian Trade Balance. In the US session we get Manufacturing, Import and Industrial Production data. The Bank of Canada’s Macklem speaks in the afternoon. Lastly, we get Manufacturing and Services data from Australia.
Wednesday - First up is UK inflation data. It's a big day of Manufacturing and Services PMI’s with the Eurozone, France, Germany, UK and US all delivering numbers. We also get Eurozone Trade Balance and US Retail Sales before the US Federal Reserve Interest Rate Decision and statement.
Thursday - The day starts with Australian Employment and Unemployment numbers before the interest rate decision from the Swiss National Bank. Eurozone year on year CPI data comes next. At midday we get the Bank of England’s interest rate decision. From the US its Philly Fed and Weekly Unemployment numbers.
Friday - UK Consumer Confidence is the first data of the day before the Interest Rate decision and statement from the Bank of Japan. Next up is German PPI and IFO data and Eurozone Current Account numbers. From the UK we get Retail Sales and Bank of England Quarterly Bulletin. Canadian Retail Sales and US Bank Stress Tests come late in the session.
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