No white smoke over Brexit talks

A grey and dreich start in London but it ought to clear. Rather like the weather, it’s all looking a bit murky as far as Brexit goes this morning. European stock markets opened cautiously on Monday with Brexit risks squarely in focus as talks over the weekend seem to have delivered little real progress. There are various reports circulating this morning, but the one that counts will be the official statement. Reports of a breakthrough on fishing rights seems to be premature, with UK officials saying the EU is ‘literally making it up’. There is no white smoke yet – the two sides continue to talk and work towards a deal. A complicating factor this week is the internal market bill, which is going through the Commons again and has really got up the noses of the EU. The dealmakers will not let that stop the talking, but it could create headlines.  

Sterling risks to Brexit no-deal endgames were exposed this morning as the chatter was less optimistic than many of us thought it would be, with reports in one paper indicating Boris Johnson is ready to walk away within hours. Moreover, confusion over progress on fishing has clearly unnerved the market. GBPUSD slipped from 1.34 overnight to 1.3280 in early trade, a chunky move to start the session and reflective of both the pound’s sensitivity to headlines and the severe downside risks from a no-deal Brexit. Latest CFTC figures show a sharp reduction in net long positioning on sterling. 

US stocks roared to a new record high on Friday. The S&P 500 climbed 0.9% to 3,699, closing at the highs of the day. A lacklustre US jobs report showing just +245k jobs were created last month lifted stocks and saw bond yields rise as it ought to incentivize Congress to pass a stimulus bill this year. Bad news is good news again – for now markets are happy to jump the shark and look ahead to stimulus bridging the worst of the crisis until vaccines drive economic recovery in 2021. There was some serious curve steepening action on Friday with the US 10-year yield rallying above 0.98% and a big clear out at 1% is now ‘on’. The 2yr/10yr spread is now its highest in almost three years. 

Stimulus seems a lot more likely and a $908bn bipartisan package could be passed as early as today. The weaker jobs report combined with surging case numbers across the US has left lawmakers with little choice, albeit the deal on the table has been drawing criticism from both sides of the Washington divide. All Americans who wish to take a vaccine should be able to by the second quarter of 2021, the US Health and Human Services head Alex Azar said. 

Data is light today, but Asian markets were mixed after China’s exports rose over 20% in November, the fastest clip in three years. German industrial production rose 3.2% in October, beating expectations but likely to the best for some time with November’s restrictions kicking in. Bavaria has just announced a much stricter lockdown lasting until early January.