Just another Brexit delay

One final push this week before markets enter into holiday mode and with so much still unresolved, it should be quite the final stretch.

Asian markets were quite mixed overnight and European markets look poised for a similar start to the week as well. US approval for the Pfizer vaccine at the end of last week means rollout can begin almost immediately, giving investors a little more cause for optimism, although it would have been a massive shock had they not done so.

Brexit deadline comes and goes

There is so much to be resolved and with so little of the year remaining, this week should be when everything finally comes together. Sunday’s Brexit deadline proved to once again be pencilled in rather than set in stone, to the surprise of no one, with leaders vowing once again to go the extra mile and use every minute to secure a deal.

It does seem like some progress is being made and with neither side willing to be the ones to call off the talks, a minute to midnight compromise looks likely, regardless of what various sources are saying in the media. This is a negotiation after all and there’s nothing to be gained by showing your hand at this point.

No-deal nerves are undoubtedly kicking in though with sterling slipping into the end of last week as traders prepared for the possibility of a collapse in talks on Friday. The cost of hedging continues to rise as well as we move ever closer to the ultimate deadline, just as it has each and every time past negotiations have gone to the wire, risking the dreaded no deal.

The pound is enjoying a bit of a relief rally at the start of this week. Relief, it seems, at not suffering a horrific plunge as the two sides call it quits on the talks and proceed on WTO terms. That may still come to pass. But as long as the two sides are talking, there remains the belief that common sense will prevail and a deal will be reached that avoids the cliff edge on January 1st. I expect volatility will remain rather heightened in the coming days.

Time is also fast running out for US lawmakers to agree on a combined spending and relief package that avoids a festive partial government shutdown and supports the economy through another horrific wave of Covid-19. They last week bought themselves a little extra time but that is very shortly up as well.

With both sides seemingly converging on something that resembles the bipartisan proposal, in value at least, it seems an agreement will be reached that ensures government remains funded and programs due to expire at the end of the year are extended. It would be incredibly irresponsible to pile on the problems as we continue to see record cases and fatalities.

That won’t stop the Fed from having to do its bit though and with an agreement on Capitol Hill not a guarantee, the central bank may have to go a little further to ensure they provide the accommodation that’s required. More longer dated bond purchases is what’s expected this week but the focus may well be on whether officials are coming around to the idea of yield curve control yet.

Central banks will be hoping that the vaccine rollout will reduce the dependency on them next year and going forward but there’s still a job to be done in the interim, as we move out of firefighting mode and into the recovery.

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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