Morning Commentary: The EU Summit

Foreign Exchange - Morning Commentary
The EU Summit 
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
European leaders have gathered in Brussels for the EU summit today and tomorrow. The heads of states are expected to discuss the COVID-19 situation, Brexit, climate change and relations with Africa. What isn’t on the official agenda is the Multiannual Financial Framework (MFF) and the recovery fund (NGEU). 

Back in July, EU leaders reached a political agreement on the NGEU and the MFF, or the EU’s long-term budget. At the time, the formation of the Rule of Law conditionality, which linked the payment of NGEU funds to certain standards, was left intentionally vague. Now that the EU is attempting to translate this principle into a legal act, it is proving very difficult to do. The European Commission has proposed a compromise that softens the Rule of Law definition, but Hungary and Poland still remain against the proposal, while a group of northern countries led by the Netherlands rejects the compromise as going too far, leaving talks deadlocked. 

Due to this deadlock and the importance of the MFF and NGEU, these two topics should come up despite not being on the official agenda. Most likely, the MFF and NGEU won’t come up during the discussion between the 27 leaders. However, it is very likely that some leaders, including Hungarian Prime Minister Orban, Polish Prime Minister Morawiecki, Chancellor Merkel and President Macron, together with EC President Von der Leyen and Council President Michel, will try to find a way to unlock the situation and pave the way for a Council agreement.

Ultimately, the expectation remains for all sides to come to an agreement. But even if an agreement were to happen soon (unlikely), actual implementation will come after the initial target of January 2021. This means that an already shaky euro area economic recovery will be without needed stimulus for longer than initially hoped.
  • U.S. initial jobless claims disappointed market expectations. For the week, 898K jobless claims were filed versus expectations for 825K. Claims are now back to their highest levels since August. It should be noted that California’s numbers have been frozen as the state works to clear its claims backlog and install fraud detection technology. This means claims numbers will likely be distorted through the end of the month. Conversely, continuing claims dropped from ~11 million to ~10 million but remain historically high. 
  • Treasury Secretary Mnuchin admitted that it is unlikely we will get fresh stimulus before the election, further adding to negative market sentiment. The U.S. economy will now head into the winter months, during which the COVID-19 drag is expected to increase, without much-needed stimulus.
  • Countries across Europe continue to increase COVID-19-related restrictions. London’s risk level will soon be moved to “Tier 2,” France has imposed new curfews, and Germany took some piecemeal measures with more restrictive steps to follow. In Asia, where the virus is more under control, Singapore and Hong Kong have created a travel bubble to allow unrestricted travel between the two. 
  • The U.K. has agreed to extend its unofficial Brexit deadline after tentative signs of progress on fisheries emerged. So now instead of walking away today, Prime Minister Johnson will now wait until the end of the EU summit to decide if he will extend the deadline into next month or walk away. Markets continue to expect some sort of “skinny deal” despite all the rhetoric going back and forth between the EU and the U.K.
  • Australia’s jobs report came in better than expected, as employment fell less than expected. During the month of September, the country lost 29.5K jobs versus expectations for a 40.0K drop. This was the first contraction since May and reflects the lockdown in Victoria. The drop was mainly concentrated toward full-time positions, with the overall report showing the labor market under stress. On the monetary policy front, Reserve Bank of Australia Governor Lowe discussed the possibility of including the 10-year bond into the bank’s yield curve control program.
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