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Preparations start for a no-deal outcome

CMC Markets

It was another mixed session for European stocks yesterday, with the FTSE 100 outperforming on the back of a slightly weaker pound, but it was notable that we saw heavy falls in UK banks and other stocks with a domestic focus on no-deal Brexit concerns. US markets also had a mixed session, with the Nasdaq outperforming while the Dow and S&P 500 both finished in negative territory.

Yesterday’s weekly jobless claims numbers showed a surprise surge to 853,000, well above expectations of 725,000, and raising the prospect that the US economy is now starting to see an acceleration in economic weakness, as the lack of a new stimulus deal starts to act as an anchor around the ankle of the economic recovery since April. All the while US coronavirus cases have continued to rise. If this surprise jump in the jobless claim’s numbers, and rising virus cases doesn’t concentrate minds among US lawmakers on Capitol Hill, it’s difficult to imagine what will, as differences between Democrats and Republicans continue to delay an aid package. This procrastination continues to limit the upside of US stocks despite another successful IPO, this time Airbnb, which closed 113% above its IPO price, following on from the successful launch of Doordash the day before. On a more positive note, a US FDA panel granted emergency approval for the rollout of the Pfizer vaccine.  

With UK-EU trade talks extended to the weekend, both the EU and the UK have started to prepare the ground for a no-deal outcome. EU Commission president, Ursula Von Der Leyen, outlined a number of contingency plans, or mini deals, which included various measures to deal with aviation safety, air and road connectivity, as well as fisheries, in order to ensure no disruption on 1 January 2021. UK prime minister, Boris Johnson, also put the UK on notice for a no-deal outcome, saying that he was sceptical about the prospect of an agreement.

The pound did come under pressure but overall, there still seems to be some optimism that pragmatism will prevail as the 31 December deadline gets closer, and the realisation slowly dawns of the potential economic damage that could ensue in the days after a no-deal outcome. An outcome that in the current circumstances would simply heap economic pain on top of economic pain.

Bank of England governor Andrew Bailey, who is scheduled to speak later this morning as the central bank publishes its financial stability report, has already gone on the record as saying that a 'no' trade deal Brexit would inflict more damage on the UK economy than the coronavirus pandemic, a message he is likely to repeat. The Bank of England also announced the end of its ban on UK banks paying dividends yesterday, a curious decision if a no-deal Brexit is just around the corner. If a no-deal is as damaging as Andrew Bailey says it could be, surely the Bank of England would have delayed any decision on this until next month?

There still seems to be this naive belief, particularly on the EU side, that a no-deal outcome will be worse for the UK, if comments from Luxembourg prime minister Xavier Bettel are any guide, conveniently forgetting that the continent is already being ravaged by the very same pandemic, and that the UK has much more flexibility on both fiscal and monetary policy to absorb an economic shock, from such an outcome.

Yesterday’s action by the European Central Bank to expand its PEPP programme by another €500bn and extend it to March 2022, while welcome, is already the equivalent of pushing on a string, and while the obstacles to the passing of the latest €1.8trn EU budget and stimulus package have been removed, the EU needs to do a lot more on the fiscal side to even get close to an effective response. The ECB decision didn’t appear to be unanimous, with discussions around a six-month or 12-month extension, before the consensus settled on nine months. There were also some differing views on the economic outlook.

The euro actually went up in the aftermath of yesterday’s decision, which suggests that markets think that the ECB will struggle to do much more, and with the Federal Reserve due to meet next week, and unlikely to talk the US dollar up, there is likely to be much more strong currency pain to come for the ECB.

The French government yesterday announced that it would be delaying the lifting of some of the restrictions it imposed at the beginning of November, and instead would be imposing an 8pm curfew through Christmas and New Year, in an effort to slow the spread of the virus. Museums, theatres and cinemas would remain closed, along with restaurants and bars which are closed until well into January next year.  

The EU summit will continue into today, while EU and UK negotiators will continue to talk until Sunday, however it is doubtful that we’ll see any progress by then, and we will then be faced with the option to carry on talking, or call a halt and accept the prospect of a no deal, given the scale of the differences between the two sides. Ultimately the real deadline remains 31 December, so while officials talk of a Sunday deadline, the only date that really matters is 31 December. Everything else is just noise. The level playing field continues to be the main sticking point, and any enforcement mechanism.

European markets look set to open slightly lower as we head into what is set to be another important weekend, and another deadline extension.

EUR/USD – while trading above support at 1.2060/70 the bias remains for a move towards resistance at the 1.2230 area, and beyond that at the 1.2550 area, and 2018 highs. Only a move below 1.2020 negates the upside scenario  

GBP/USD – slipped back from just below the 1.3500 area on Wednesday, but has thus far held above the lows this week at 1.3225. A break below 1.3200 argues for a retest of the 1.3100 area, and possibly 1.2850. The 1.3500 remains a key barrier for further gains.

EUR/GBP – having found support at the 0.8980 we rallied back towards the 0.9150 area. A break higher suggests a move back to the 0.9300 level. A move below 0.8980 targets a return to the 0.8860 area.

USD/JPY – currently has resistance at the 104.70 area, and while below the risk remains for a move back to the November lows at 103.81.