There once was a tow-haired PM
Who rallied supporters ‘gainst ‘them’
At first ‘them’ was Labour
But now it’s their neighbor,
The EU, they need to condemn
With less than two weeks to agree
A deal leaving much of trade free
It’s come down to fish
Which both sides do wish
Were subject to their own decree
Today will be the last poetry of 2020. Come January 4, 2021, FXPoetry will return with prognostications for 2021. As such, let me wish all my readers a happy and healthy New Year.
One of the biggest benefits of 2020 coming to an end is the fact that the Brexit story should finally be put to bed. Whether or not a trade deal is agreed by December 31st, it is unambiguous that the UK will have a changed relationship with the EU going forward. As such, there will be no more histrionics regarding negotiations and investors and traders will return to valuing UK assets and the pound based on more fundamental views. But we are not there yet, and so the ongoing Brexit negotiations continue to have a significant impact on markets. If you recall, just one week ago, rumors were flying that the talks were going to collapse, and the UK was going to walk away. Of course, that didn’t happen, and now it appears that fishing rights are the last remaining issue to be agreed.
In a nutshell, the EU want unfettered access to the UK’s fishing grounds, which are amongst the richest in the world, and which they have enjoyed for the past 47 years, ever since the UK joined the EU in 1973. At the same time, the UK wants to control its sovereign waters, which was part of the entire rationale for Brexit in the first place, for the nation to regain its sovereignty. It is also important to remember that from an economic perspective, fishing represents 0.1% of the UK economy and even less of the EU’s economy. The point is, this is a symbolic issue, as opposed to a critical economic outcome. Apparently, the UK has offered a 3-year transition period with no changes, and then want to review/renew licenses every 3 years thereafter. The EU, meanwhile, wants no change in the current situation. It seems to me, that of all the issues that have been addressed, this would be one of the easier ones to solve, and I remain confident it will be solved. Perhaps 5 years or 7 years will be agreed, but some number will be agreed.
However, with both sides still full of bluster on the issue, threats of the talks breaking down are daily events, and today, it seems the market is in a more credulous mood. As such, after a week where the pound, along with almost every other currency, rallied pretty sharply, we are seeing some profit-taking that has seen the pound retreat 0.45%, making it the worst performer in the G10. None of this, however, has changed my view that a deal will be reached before the end of the year.
On a different note, the BOJ completed their last meeting of the year and surprised the market by explaining they were going to conduct yet another review of their policies, to be completed in March. While leaving interest rates and asset purchase targets unchanged, they did extend their special pandemic related support programs by an additional six months. But the news of the review is the talk of the market, with initial speculation that they may adjust their yield curve control policy to target a different tenor (currently they target 10-year yields at 0.00% +/- 0.20%) in their efforts to stoke inflation. Alas, as demonstrated by last night’s data, they continue to fail miserably in this task. CPI was released at -0.9% on both a headline and ex fresh food basis. While a review may well be a good idea, it will only be useful if they actually define a policy that helps them achieve their goal of 2.0% inflation. Unfortunately, for the past twenty-eight years, they have not really come close. As to the yen, which has been strengthening this week along with most currencies, it too has softened overnight, down by 0.25%.
And those are really the stories of note this morning. Risk sold off across Asia (Nikkei -0.2%, Hang Seng -0.7%, Shanghai -0.3%) although European bourses are marginally higher at this time (DAX, CAC and FTSE 100 all +0.1%). US futures, meanwhile, are essentially flat on the day, as traders prepare for triple witching day today, when stock options, stock index futures and stock index options all expire. Historically, they have been known to see some large moves, but right now, that doesn’t seem the case.
Bond markets, despite the lackluster stock performance, are under pressure as well, with most European bonds seeing yields rise (Bunds and OAT’s +1bp, PIGS +2bps to+6bps), although with the concern over Brexit, Gilts have seen haven demand and yields have decline 2bps. Treasuries, meanwhile, are essentially unchanged, and continue to hover just below the 1.0% yield level that so many expect to be breeched shortly.
Both oil and gold prices are little changed on the day while the dollar is benefitting from what is almost certainly profit-taking and position adjustment heading into the weekend. As such, it is higher vs. most of the G10, albeit only marginally, and firmer vs. most of the EMG bloc. The noteworthy moves in EMG are RUB (-1.1%), which fell ahead of the central bank meeting, where they left policy unchanged, and has not seen any recovery since, and HUF (-0.6%) which has seen selling interest after the budget deficit there topped expectations.
Data-wise, yesterday’s Initial Claims data was a bit worse than expected, which doesn’t bode well for Q4 GDP in the US, but Housing Starts and Building Permits remain strong. Philly Fed also disappointed, another indication that growth here is moderating. This morning’s only number is Leading Indicators (exp 0.5%), but that seems unlikely to have an impact. Rather, consolidation is today’s theme, and while the trend remains firmly for a lower dollar, it would not be surprising if it finishes the week on a high note.
Until 2021…good luck, good weekend and stay safe