Markets
Stakes in the Brexit poker game are ever rising and so are market nerves. After little progress in talks was made on Wednesday, both the UK and EU agreed to continue negotiations until Sunday. The current atmosphere is outright negative. UK prime minister Johnson warned businesses and the public to prepare for leaving the EU without a trade deal. European diplomats downplayed Johnson’s words, saying they aren’t a surprise and some are still expecting a deal either Sunday or in the following days. Whether or not it’s a negotiating tactic, his pessimistic comments were later echoed on European soil by von der Leyen. The EC president said it’s now more likely to have no deal. The Brexit news dominated over the other European news that the multi-annual budget and pandemic recovery fund has been rubber-stamped by all member states. European and US equities fall about 0.3-1% with markets also on edge after disappointing Covid-trial results (see below), the ongoing impasse in US fiscal talks and the possibility of a US government shutdown by midnight. The EuroStoxx50 struggles not to lose support at 3496 (76.4% Fibo retracement 2020 high-low). Core bonds gain with the German Bund outperforming US Treasuries and more than offsetting losses yesterday after the ECB’s end-of-cycle monetary easing. The German yield curve bull flattens with yields changes varying from -1.7 bps (2-yr) to -4 bps (30-yr). Peripheral spreads widen slightly but Greece and Italy (+2 bps) underperforming. Peripheral yields, however, do drop today even as risk-off dominates with Spain the next southern country (after Portugal) to see its 10y yield (temporarily) dipping below zero. US yields decline with the belly of the curve (-2.4bps/-1.5bps) outperforming the wings (-1.4bps/-0.8bps).
The pound gets hammered. EUR/GBP jumped a full big figure from the 0.9125 area to 0.923 before retreating to trade at around 0.917. Cable falls from 1.3295 to 1.321 currently. Several gauges of (implied) sterling volatility soar as we head into yet another crucial Brexit weekend that will have to yield at least some progress if a no-deal is to be avoided and prevent the pound from falling off a cliff. The euro has a rougher day as well. Today’s decline surely is to some extent inspired by the lingering Brexit uncertainty and looming no-deal threat which would be of no help for a pandemic-stricken Europe either. The actual trigger for the euro decline however came from French ECB governor Villeroy however. He repeated Lagarde’s quote yesterday saying the ECB is closely watching (“very vigilant”) the euro exchange rate, adding however that the central bank is “ready, according to this vigilance, to use all our instruments”. While the ECB probably lacks the actual means to counter a dollar-triggered EUR/USD strengthening, the currency pair did retreat from intraday highs near 1.216 to 1.212 currently. USD/JPY performed a test of the 104 support area but avoids a break lower for the time being.
News Headlines
Sanofi and GlaxoSmithKline reported trials of their COVID-19 vaccine failed to provide a sufficient immune response in older people. The companies will begin a new second phase study in February. Potential availability of the vaccine might be delayed to the end of next year. Australia also cancelled the production of a vaccine developed by biotech firm CSL and the University of Queensland after antibodies generated by the vaccine lead to false positive HIV results. The announcements illustrate potential roadblocks producers face as they develop new vaccines. It also creates uncertainty on the planning/implementation of vaccinations for governments that ordered the vaccines.
The Bundesbank painted a positive outlook for the German economy. The bank expects a sharp economic recovery after the fourth quarter of this year and the first quarter of next year. Expectation for this year was upwardly revised to -5.5% from -7.1%. Growth next year was revised down from 3.2% to 3% but is expected to accelerate further and hit 4.5% in 2022. Activity would then already reach pre-crisis levels early 2022.
