It cannot be very surprising
That Boris and friends keep devising
More reasons to talk
Yet both sides still balk
At genuinely compromising
For now, though, the market’s delighted
With risk appetite reignited
Pound Sterling has soared
With stocks ‘cross the board
Though bond love has been unrequited
Aahh, sweet temptation. I’m sure most of us know, firsthand, how difficult it can be to impose self-control when it comes to something we really want, but know we shouldn’t have, like that extra cookie after dinner. Or perhaps, it is the situation of something we really don’t want, but know we need, like that trip to the dentist. In either case, getting ourselves to do the right thing can be an extraordinary struggle. That is the best analogy I can find for the countless Brexit trade talk deadlines that have been made and passed since the actual Brexit agreement was signed on January 31, 2020.
You may recall last Thursday’s dinner date between Boris and Ursula, where the outcome was a declaration that if a deal could not be reached by the weekend’s close (yesterday), none would ever come. The thing about Brexit deadlines, however, is that they only exist in the mind of the individual setting them. It appears to be a tool designed to impose self-control on the speaker. However, like so many of us, when we claim we will eat only one cookie, we find the temptation to eat another too great to ignore. This appears to be the same situation when it comes to establishing Brexit talk deadlines, both sides really want a deal, and hope that a deadline will be the ticket to finding one that can be agreed. But in the end, the only true deadline is the one inscribed in the Brexit agreement, which is December 31, 2020. And with that as prelude, it is quite clear that the latest deadline has been ignored, and both sides have explained that a deal is within reach and they will continue talking, right up until New Year’s Eve if necessary.
This past Friday, there were rumors rampant that the whole situation would fall apart, and that risk would be jettisoned as soon as markets opened in Asia last night. Expectations were for a huge Treasury rally, with sharp declines in stock markets. But for now, that situation remains on hold, and the good news has inspired further risk acquisition, with most equity markets solidly higher along with oil while bonds are selling off along with the dollar.
As I have maintained for the past several months, despite all the rhetoric on both sides, the most likely outcome remains a successful conclusion to the talks. It is unambiguously in both sides’ interest to agree a deal, and everything that we have seen has been for each sides’ domestic constituents as proof they fought to the last possible second and got the best deal possible. In fact, part of me believes a deal has already been agreed, it just hasn’t yet been revealed as the timing is not propitious for both sides. Whatever the situation, though, for now, the market has been satisfied that there is nothing imminent that is going to stop the risk rally.
And that pretty much sums up the session, there is nothing imminent that is going to stop the risk rally. Looking ahead for the week, Retail Sales on Wednesday morning is arguably the most important data point, but of more importance is the FOMC meeting that same day, with the afternoon statement and press conference. We will focus on that tomorrow and Wednesday, but as of now, there is no change expected in either the interest rate structure or quantity of QE, but there is some discussion of a change in tenor of QE purchases.
With all that in mind, then, let us look at markets overnight. As discussed, risk appetite is growing as a combination of the positive Brexit story and the first rollouts of the Covid vaccine encourage the outlook that the timeline for reigniting economic growth is nearing. Adding to this story is the news that a US fiscal stimulus bill may be close to being agreed, and, naturally, we know that every central bank will continue to add liquidity to the markets for as long as they deem fit, which currently seems to be indefinitely. Interestingly, this is all occurring despite Germany imposing renewed harsh lockdowns through January, and word that we are going to see the same in Italy, Spain and the UK.
But here’s what we have seen. Asian equity markets were generally positive (Nikkei +0.3%, Shanghai +0.7%) although the Hang Seng (-0.4%) lagged. European markets are all higher, with some pretty good gains (DAX +1.25%, CAC +1.1%) although the FTSE 100 (+0.4%) is lagging on the strength of the pound, which negatively impacts so many companies in the index. And finally, US futures are all green with gains between 0.6% and 0.9%.
Bond markets are selling off, which should be no surprise, with Treasury yields higher by 2.5 bps, although most of Europe has seen more moderate price declines, with yields higher by less than 2 basis points across the board. With one exception, UK gilts have seen yields rise 6.7 basis points, as hopes for a Brexit deal have led to a lot of unwinding of Friday’s rally.
Meanwhile, oil prices are firmer (WTI +1.1%) but gold is actually softer (-0.7%) despite the dollar’s broad weakness. In the G10 space, GBP (+1.5%) is the leader by far, as renewed hope has forced some short covering. But the entire bloc is firmer with NOK (+1.1%) benefitting from oil’s rise, while the rest of the group has gained on a more general risk appetite with gains between 0.2% (CAD) and 0.6% (SEK). The surprise here is JPY (+0.3%) which given the risk attitude, would have been expected to decline as well.
EMG currencies are mostly firmer, but the move seems to have ignored peripheral APAC currencies, where a group have seen very modest declines of 0.1% or so. On the plus side, however, ZAR (+1.0%) leads the way, despite weaker gold prices, as Consumer Confidence data was released at a strong gain compared to Q3. Elsewhere, BRL (+0.7%) and PLN (+0.7%) are the next best performers, with broad dollar sentiment the clear driver. In fact, the entire CE4 is strong, as they demonstrate their ongoing high beta performance compared to the euro (+0.35%).
Data this week is really concentrated on Wednesday, but is as follows:
|FOMC Rate Decision||0.00% – 0.25%|
So, really, all eyes will be turned toward Washington and Chairman Powell as we await any indication that the Fed is going to change policy further. Expectations are growing around new forward guidance, for explicit economic targets to be achieved before adjusting rates, but in any case, there is no expectation for rates to rise before the end of 2023. Perhaps new forecasts and the new dot plot will add some new information, but I doubt it.
For now, risk remains in vogue, and as long as that remains the case, the dollar will remain under pressure. But don’t expect a collapse, instead a modest decline, at least vs. the G10. Certainly, there are some emerging currencies, notably BRL, which I think have room to run a bit more.
Good luck and stay safe