Behind the curve

Boris Johnson and his Brexit negotiating team, under David Frost, have put on an unbelievable piece of theatre surrounding the Brexit deadlines. The latest mid-November deadline has seemingly exerted enough pressure on the European side to gain some concessions, and raise the probability of deal magic in the next fortnight. The EU’s Chief Negotiator, Michel Barnier, is so hopeful that he is extending his stay in London in the expectation of getting a deal across the line before November. Before we surge in hope for better independent governance, let’s consider the numerous downsides to the current political trajectory. 

As reported in the Financial Times this morning, Boris Johnson’s administration hasn’t yet met with a single senior Biden official, despite his lead in the polls. Given how much the UK’s relationship has been determined through the Trump medium, the real possibility of a Biden win would reset relationships. With the incumbent at a time when Brexit negotiations and coronavirus measures are already taking up the entirety of the governments bandwidth. In this case, a little bit of proactivity by government is worth its weight in gold. Although there is hardly head space remaining, once one accounts for Boris Johnson’s  play acting, and the sheer confusion that is the UK’s coronavirus policy.

The latest polls show Joe Biden seems to be maintaining his lead (Biden is 51.4% to Trumps 42.7%, according to RealClearPolitics), and markets seem to have mostly priced in a Biden Presidency and the associated return of inflation. The reason the two are correlated in the market’s view, is that Biden’s expected fiscal spending (unlike Trumps tax breaks) are expected to stimulate the real economy. The problem is that this assumes the Democrats can gain strong majorities in both houses of government too, else they face stiff opposition to fiscal spending.

According to PredictIt, a multi-university research effort, the odds of a Democratic clean sweep (Presidency, Senate and House Majorities) are at 53%, which is much lower than earlier in the month. Looking purely at the House and Senate races you see a more optimistic picture for Democrats, whose likelihood of a clean sweep is 60%. While a status quo Democratic House and Republican Senate is a solid 31% probability. This tells us that outright obstruction of a Biden agenda is unlikely, but there is still a very real chance the Democrats will struggle to pass any spending in 2021, if the Republicans lose the big seat. You can already see this in the tone of the current budget wrangling. Both the Trump Administration and the Democrats are working towards a spending bill in the order of $1.7bn (though they disagree on the deployment of the funds) but the Republicans, sensing losses in November, are loathed to give the Democrats a win.

Bottom line: The market may be positioned too strongly for both a positive UK outcome – even if a Brexit deal is agreed – and a Biden win. Neither of these are the end of the race, they are just the end of the first stage of a very long and hurdle-ridden route towards economic growth. From our perspective, clients waiting for a Sterling rally on Brexit news should focus more tactically on small rebounds and settle in for the long haul. The same with Dollar depreciation under Biden. The envisaged growth depends on much hard wrangling before it comes to fruition and the Republicans have proved, if nothing else, they will do whatever it takes to realise their vision of the USA.


The week ahead

GBP

Sterling continues to react aggressively to positive Brexit headlines, boosting optimism that a trade deal will be achieved with the EU by the end of the year. It emerged last Wednesday that trade talks would restart, aiming to form a trade deal by mid-November. This caused Sterling to rally above 1.3150 against the US Dollar and close to 1.1100 against the Euro. However, economic headwinds remain, with the latest news over the weekend of possible implementation of ‘local circuit breakers’ and a new restriction tier if current measure fail to prevent the spread of coronavirus. A continuation of Brexit headlines could bring more short-term volatility for Sterling in the week ahead.

  • On Wednesday, Nationwide’s House Price Index is expected to show 0.4% growth in October, slowing from 0.9% in September. Meanwhile, the year-on-year indicator is forecast 5.2% growth, up from 5.0% last month.
  • Thursday’s Mortgage Approvals figure is expected to show 76.1k new mortgages were approved during September, down from 84.7k in August.

EUR

On a trade-weighted basis, the common currency still trades less than 1% away from multi-year highs, despite the spiralling coronavirus situation which has caused new restriction measures across Spain and Italy. The Euro begins the week in the red, ahead of Thursday’s ECB’s monetary policy decision, as broader risk sentiment has deteriorated. The ECB had been relatively upbeat about the Eurozone’s economic recovery after the first wave of infections earlier in the year. However, the new wave of infections and lockdown measures may cause Lagarde to strike a more cautious tone on Thursday. There may even be mention of more economic stimulus down the road.

  • This morning’s German IFO surveys showed a deterioration in the Business Climate and Expectations surveys, which also missed expectations. Meanwhile, the Current Assessment survey both improved from September’s reading and beat expectations.
  • On Tuesday, Spain’s Unemployment Rate for Q3 is expected to have accelerated higher to 16.1% in Q3 vs. 15.3% in Q2.
  • Wednesday’s French Consumer Confidence is expected to read 93, down from 95 in September. This would bring the measure back in line with its lowest reading so far this year, back in May.
  • On Thursday, German Preliminary CPI for October is forecast 0% growth, an improvement from September’s -0.2% price growth.
  • Thursday’s Italian Consumer and Manufacturing Confidence for October are expected to tick lower, to 102.3 and 91.8 respectively.
  • Friday’s Eurozone year-on-year GDP to Q3 is expected to read -7.0% economic growth, up from -14.7% in the year to Q2. The Eurozone CPI figure is expected to have remained constant at 0.1% in October and -0.3% year on year.

USD

The trade-weighted US Dollar Index fell over 1% last week, as we edge nearer to the US election. Which according to the polls, is favouring a narrow Biden win. As we look ahead to month-end, broader risk sentiment is lower, lifting the US Dollar against most of its peers. Surging coronavirus infections across the US and Europe, as well as uncertainty around US stimulus, are major concerns for markets at the minute. These could trigger a new discussion of monetary stimulus from major central banks, beginning with the ECB this Thursday.

  • Tuesday’s Durable Goods Orders for September is expected to read 0.5%, unchanged from August.
  • Tuesday’s CB Consumer Confidence is expected to tick marginally higher to 101.9 in October, which would be the measures highest reading since March 2020.
  • Thursday’s Jobless Claims are expected to show 780k people were unemployed in the past week, unchanged from last week’s figure.
  • Thursday’s Annualised GDP for Q3 is expected to read 31.8% growth, up from -31.4% for Q2.
  • Friday’s Personal Income figure for September is forecast 0.3% growth, up from -2.7% growth in August. The change in Personal Spending for September is expected to remain constant at 1.0%.
  • Friday’s MNI Chicago PMI for October is expected to indicate further expansion, with a reading of 58.0, slowing from 62.4 last month. Meanwhile, the University of Michigan’s Consumer Sentiment figure is expected to remain unchanged at 81.2 in October.

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