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UK have underestimated consequences of leaving single market

​​​​​​Today's news headlines:

  • ‘EU tells UK it will ‘never, never, never’ compromise on single market’ – The EU’s chief Brexit negotiator, Michel Barnier, warned that the consequences of leaving the single market and customs union have been underestimated by the UK, while stressing there will be no compromise on the single market. His comments undermine previous suggestions from British politicians that Brussels might be flexible to protect trade slows when talks begin in the coming weeks. (Thomson Reuters)
  • ‘Virus poses new threat to world economy’s fragile stabilisation’ – The outbreak of the Coronavirus is a new threat to global economic growth after previous uncertainties such as the US-China trade war and Brexit had been subsiding. While the full economic impact is still unknown, it is already clear that tourism and consumption have taken a hit, particularly in China where the virus originated. (Bloomberg)

Moving the goal post

Beyond the human cost of China’s Coronavirus, there is a market element as well. The most direct impact is the extended Chinese Lunar Holiday – Beijing officials indicating it will last until the 8th of February – and the resultant hit to growth. The more subtle cost is that there exists an expectation that this could get much worse before it is contained and may have a more enduring effect on both China and the global economy. This isn’t great news when markets are desperately looking for signals of a return to growth. Moreover, the Fed, European Central Bank, Bank of Japan and Bank of England may be tempted to sound a more conservative tone in their respective policies until the scale of the crisis is apparent. 

It sounds subtle, but it’s an important point. Further extension of ultra-easy central bank policy – Coronavirus is just the latest reason – may have serious consequences for global asset prices.  Thinking back to 2019, despite falling GDP growth and inflation, asset prices were climbing. In 2020, we are expecting central banks to play a more passive role, because growth is hopefully bottoming out, but more importantly because central bankers have become increasingly vocal about the distorting effects of protracted policy easing. Now that another reason for delay has cropped up, the danger is that assets prices will take another leg higher towards even more preposterous levels. Fingers crossed for strong economic data and a speedy resolution to the virus, so we can finally empty the monetary policy punch bowl.

Bottom line: Just this morning in Bloomberg there was a very thoughtful piece that explains the change in S & P 500 index composition and then goes on to explain persistently higher valuations.  This is worrying because, setting aside a few compelling points, it is an attempt to justify current lofty valuations entirely ignoring the elephant in the room, the approaching summit. The currency impact of the virus ties into the persisting strength of safe haven currencies; it is difficult to imagine how the Greenback might depreciate with a continuation of a policy status quo.


The Dollar continues to advance amid a global flight to safe-haven assets triggered by the rapid spread of the Coronavirus. The pair opened London lower as PM Johnson makes a critical decision regarding permissions for Huawei to enrol its 5G network in the UK. Meanwhile, CBI sales data out at 11am – which is usually an overlooked data point – risks further intra-day volatility for the Pound, as investors update credence regarding an interest rate cut.


Yesterday’s movement in the currency-cross were largely Sterling driven as the Euro remained flat. This morning, the pair opened lower as Sterling sold-off ahead of UK CBI sales data while the Euro index was unchanged. The 4-week trend on the Sterling index suggests further downward pressure for the pair may continue, but the 50-daily moving average may provide support for the pair in the short-run.


EUR/USD volatility continues to fall as the pair traded inside a 30-pip range yesterday. This afternoon’s US economic data may bring some volatility for the pair ahead of tomorrow’s Federal Reserve decision. EUR/USD has so far been supported by the 1.10 figure, but these events risk further downside for the common currency, if the US Dollar continues its advance amid a global flight to safe-haven assets.