Morning Commentary: We Have a Deal

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

We Have a Deal Share this story: Andrew Kositkun Foreign Exchange Head Trader

In the U.S., President Donald Trump finally signed the $900 billion fiscal stimulus bill, unlocking government funding through September. The delay between when Congress passed the bill and when Trump signed led some Americans to lose expanded unemployment benefits for about a week, but ultimately, Trump’s signature means that a partial government shutdown will be avoided. However, Washington, D.C., drama is far from over. A redline version of the bill is still being sent to Congress with demands to cut wasteful spending and to include a $2,000 check for adults and $600 checks per child. House Speaker Nancy Pelosi is expected to hold a roll-call vote today to underscore Republican opposition to increased direct payment checks.  Over in Europe, the U.K. and EU finally concluded their Brexit trade agreement after four and a half years. Overall the agreement appears to be an actual compromise in that neither side can claim victory or full satisfaction with the outcome. Importantly, while this deal represents one of the hardest possible Brexit outcomes, it does include a five-year review clause that allows the opportunity to revisit the agreement, in part or in its entirety.  Starting Jan. 1, 2021, the deal will guarantee tariff-free trade on most goods and creates a platform for U.K.–EU cooperation on areas such as crime fighting, energy and data sharing. However, the U.K. will still leave the single market and customs union. This not only creates a hard customs and regulatory borders but also means an exit from the single market for services — a huge part of the U.K. economy.  Going forward, many areas of the relationship between the EU and the U.K. remain unresolved. For example, decisions regarding equivalences for the financial sector need to be made. Because of these lingering questions, the initial euphoria should give way to increased focus on the UK’s medium-to-long-term outlook.  Implementation is also an area to watch. Brexit talks were difficult ones and likely left diplomatic scars on both sides of the English Channel. It is quite possible that countries will want to show they have the upper hand by taking a tougher stance on areas not covered by the agreement. For the areas covered by the deal, it represents one of the hardest Brexit options available and will require major adjustments in the way business is conducted. This is why the U.K. is at risk of quickly returning to lower levels of growth, following the initial rebound out of its COVID-19-induced recession, than its peers. As a result, policy support will be needed, with negative rates from the Bank of England remaining a real possibility.  Regarding ratification, the EU parliament already said that it would not approve the deal this year. Instead, the council will use provisional implementation until formal parliamentary approval is secured next year. For the U.K.’s part, parliament is set to ratify the deal on Wednesday. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: On the virus front, U.S. health officials have warned of a post-holiday surge in cases as California’s hospitalizations rose to a record, with ICU utilization sitting around 100%. It is expected that California will extend the stay-home order for cities, including Los Angeles, which was scheduled to expire today. Over in Asia, concerns are mounting around a mutated COVID-19 strain originally detected in the U.K.  U.S. 10-year yields are inching closer to 1%. Markets will be watching a trio of auctions to assess the appeal of Treasuries, after which focus should shift to the Georgia Senate runoffs on Jan. 5. Chinese officials have told Jack Ma’s Ant Group to “rectify” its fintech business. On top of this, there is also an anti-trust investigation against Alibaba, another of Ma’s companies. Alibaba’s stock has fallen sharply on recent developments, leading investors to reassess regulatory risks faced by Chinese companies. While part of the increased scrutiny on Ma’s empire is due to him falling out of favor with Chinese officials, the risk remains for a spillover effect to other large Chinese internet companies.

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