Said Boris, prepare for the worst
Despite all our efforts, the first
Of Jan may result
In quite a tumult
If Europe’s stance isn’t reversed

Said Ursula, we want a deal
But England must grovel and kneel
If French boats can’t fish
Wherever they wish
This rift will have no chance to heal

Brexit remains the top story in the markets as we have heard from both sides that preparations for a no-deal outcome are necessary.  From what I can glean, it appears the fishing rights issue is the final sticking point.  And, in fairness, it is pretty easy to see both sides’ point of view.  From the UK’s perspective, these are their territorial waters, and if Brexit was about nothing else, it was about regaining complete sovereignty over itself, including its canon of laws, and the disposition of its territory.  I’m pretty confident that had the roles been reversed, and British fishing boats were making their living in French waters, the French would be equally adamant about controlling access.  On the flip side, given the UK has been a member of the EU since 1973, there are two generations of French fishermen who have only known unfettered access to UK waters, and assumed it was their birthright.  Losing that access will obviously be a devastating blow to their livelihoods, and one in which they played no part of the decision.  Of course, with that in mind, it still seems like a periodic review of access would be able to satisfy both sides.  Alas, that has not yet been agreed.

The upshot of this change in tone is that the market has begun to price in a more serious probability of a no-deal outcome.  This is obviously evident in the pound, which has fallen a further 0.8% this morning and is now back to levels last seen a month ago.  In fact, versus the euro, the pound is at its weakest since mid-September, although still several percent below the pandemic lows, and more than 6% from its all-time lows seen in the wake of the GFC.  But we are seeing this change in the interest rate markets as well, where UK debt yields are tumbling across the curve. For instance, 10-year Gilt yields have fallen 4.5 basis points today and now sit at 0.15%, just a few ticks above their all-time lows seen in August.  And all shorter maturities have turned negative, with 7-year breaking below 0.0% this morning.  As to the short end, the market is now pricing a base rate cut to 0.0% by the February meeting latest, and a further cut, into negative territory by next summer.

This Brexit gloom also seems to be seeping into other markets as we are seeing a pretty widespread risk-off move today, with European equity markets all pretty substantially lower and US futures pointing in the same direction. Perhaps part of this gloom is the fact that the ECB arguably disappointed markets yesterday.  While Madame Lagarde lived up to her word regarding recalibrating the ECB programs, there was no shock or awe, something markets learned to anticipate under the previous regime.  The PEPP was increased, but by exactly the amount expected.  It was also extended in time, but all that was offset by the comment that it may not need to be fully utilized.  But there was no addition to the asset mix, no junk bonds or equities, anything to demonstrate that the ECB was going to continue to support the markets aggressively.  And with that missing, and growing concern over Brexit, it appears investors are deciding to hunker down a bit going into the weekend.

At this point, both sides in the Brexit talks claim Sunday is the final deadline, so perhaps we will see something this weekend to move markets on Monday.  But right now, there is a palpable air of despair in the markets.

Touring all markets this morning shows that Asian equities were mostly lower (Nikkei -0.4%, Shanghai -0.8%) although the Hang Seng (+0.35%) managed a gain.  However, that is really the only green number on the boards this morning as every European exchange is lower, led by the DAX (-2.0%) and followed by the CAC (-1.3%) and FTSE 100 (-1.1%).  The idea that the FTSE 100 will benefit from a no-deal Brexit seems sketchy, at best, given whatever benefit may come from a weaker pound Sterling, it would seem to be offset by the larger economic hit to the UK economy as well as the thought that many of those companies may find their export markets crimped without a deal, and therefore their profits negatively impacted.  As to the US, futures markets have been trending lower all evening and are now pointing down about 0.8% across the board.

Bond markets are on the same page, with rallies everywhere as yields decline.  Treasury yields are lower by 2 basis points, and all of Europe has seen yield declines of between 1 and 4 basis points, with the PIGS the laggards here.  You may notice I never discuss JGB’s but that is only because the BOJ has effectively closed that market, now owning nearly 50% of outstanding securities, and thus yields there never really move as almost no volume transacts on any given day.

Commodity markets are showing very minor declines with both oil and gold looking at dips of just 0.2% or so.  In other words, this is more about financial issues than economic ones.

And finally, the dollar is definitely stronger this morning, with only the yen (+0.15%) outperforming in the G10 space.  While the pound is the leading decliner, NOK (-0.8%) is right there with it.  This is a bit surprising, as not only has oil not really moved today, but Brent crude rose back above $50/bbl yesterday for the first time since the initial Covid panic in March and remains there this morning.  Given growing expectations that next year is going to bring a lot of growth, it would seem that NOK has a lot of positives on its side.  As to the rest of the bloc, the losses are more moderate, ranging from AUD (-0.15%) to SEK (-0.35%), and all simply following the risk story.

Emerging market currencies are also largely weaker, led by BRL (-0.95%) which really appears to be a reaction to yesterday’s remarkable 3.0% rally.  With spot approaching 5.00, there seems to be a lot of two-way activity in the currency.  But the other laggards are all commodity based, which fits with the overall risk-off theme.  So, ZAR (-0.8%) and MXN (-0.65%) are leading the pack while the bulk of the bloc has declined a more manageable 0.2%-0.3%.  On the flip side TWD (+0.7%) is the biggest gainer despite modest foreign equity outflows.  This is especially odd given the ongoing decline in TWD bond yields.  But whatever the driver, demand for TWD remains robust.

Yesterday’s CPI data was a tick higher than expected, which has become the norm for the second half of the year.  This morning we get PPI (exp 0.7%, 1.5% ex food & energy) although given CPI has already been released, it will largely be ignored.  Perhaps the 10:00 preliminary Michigan Confidence (76.0) reading will garner more interest.  but in the end, neither seems likely to move the needle.  Rather, with risk appetite waning, and concerns over Brexit growing, it does feel like the dollar has further room to run today.

Good luck, good weekend and stay safe
Adf