Equity markets got the week off to a negative start yesterday, weighed down by a combination of concerns over rising coronavirus cases in the US, and the prospect that the UK and EU appear to be heading down a road to no deal, at the end of this month.
From the initial optimism of Sunday night, and talk of a possible deal on fishing, the atmosphere between the UK and EU developed an uncomfortable seasonal chill as the day progressed on Monday, with both sides appearing to openly play up the divisions between them.
From divisions on fish to the level playing field, and reports that the EU wanted to remove their own yet to be agreed Pandemic Recovery Fund from the scope of the state aid mandate, without affording the UK the same leeway, to threats from France that they would veto the whole thing if they felt any deal went too far.
When looked at from afar the divide seems to be almost unbridgeable, despite the optics of Prime Minister Johnson going to Brussels on Wednesday to meet Ursula Von Der Leyen, the president of the EU Commission, to try and break the deadlock. If the PM thinks a visit to Brussels is worthwhile then that would suggest the doorway to a deal remains open.
When looked at through this prism, and with the clock counting down, it’s almost incomprehensible that none of the divisions that have been quite visible for months now, aren’t any closer to being bridged, which would appear to suggest that a deal seems as far away as ever. Perhaps, in these strange pandemic afflicted times, this is what the choreography of a deal looks like, with both sides playing to their own domestic agendas, cognisant of the fact that for the sake of a small compromise on either side the route to a deal still remains within touching distance.
The UK for its part has offered to back down its threat to break international law in the Internal Market Bill in what is seen as a compromise, but only if a deal is agreed, however the fear remains that France might look to overplay its hand, a dangerous strategy given the damage being wrought across the continent by coronavirus.
We regularly hear how much more damaging a no-deal scenario would be for the UK, and there is no question there would be negative consequences, however the damage to the EU would be similarly severe. For a start the UK has a full set of fiscal and monetary policy levers to pull which would go some way to cushioning any fall in output. The EU has no similar mechanism due to the incomplete nature of monetary union. As things stand the EU hasn’t even managed to get sign off on its own now inadequate €750bn economic recovery fund.
For all the bluster coming from either side it is in neither side's interest to run the clock down to a no-deal outcome, however given the current state of play, that option remains a very real possibility. EU officials insisted that the deadline for any deal to be agreed was Wednesday, however as with all things EU this could well slip too.
The pound also came under pressure as a result of yesterday’s Brexit shenanigans, before recovering most of its lost ground after it was revealed the PM was going to Brussels tomorrow, ahead of Thursday’s EU summit.
We also got an early indication of the damage that the November lockdown caused to retail sales, with the latest BRC retail sales numbers, which were surprisingly resilient, rising 7.7% from the 5.2% in October. There were unsurprisingly pockets of weakness, with a 47% boom in online sales helping to offset a 56% decline in expenditure in restaurants, pubs and bars. Sales of electronic items also rose with the rollout of the new Xbox and PlayStation 5. This morning’s number is likely to be a fairly decent foretaste of next week's UK retail sales numbers.
Markets in Asia have seen a fairly subdued session, as investors sit on the sidelines awaiting the next move in the latest round of US stimulus talks, an ever increasing rise in US coronavirus cases, and the latest progress in EU/UK trade talks. This uncertainty is expected to translate into a slightly lower European open this morning.
On the data front it looks set to be a fairly low-key day with a reconfirmation of the EU Q3 GDP at 12.6%, while the latest German ZEW survey for December is expected to show an improvement to 46, from November’s 7 month low of 39.
EURUSD – slipped back to support at the 1.2070 level yesterday, which has so far contained the downside. While above this support and the 1.2020 area the risk remains for a move towards the next resistance sitting near the 1.2230 area, on the way to the 1.2550 area and 2018 peaks.
GBPUSD – slid back yesterday rebounding from the 1.3225 area, with the risk of further losses towards 1.3100, and possibly, the November lows at 1.2850. We need to move back above the 1.3420 area to stabilise.
EURGBP – the break above the 0.9080 area yesterday, has seen the euro retest the 0.9150 area, with the risk we could head back towards the previous peaks just below 0.9300. Support remains at the 0.8980 area and last Friday's low.
USDJPY – continues to look soft while below broad downtrend resistance at the 104.70 area, which if respected should see a return to the November lows at 103.81.