Morning Commentary: Always Time for Another Deadline
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Always Time for Another Deadline
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Andrew Kositkun Foreign Exchange Head Trader
After more than four years and countless missed deadlines, the U.K. and EU have yet to finalize Brexit negotiations. On this past Sunday, which was the latest “deadline,” U.K. Prime Minister Boris Johnson and European Commission President Ursula von der Leyen agreed to extend talks, as it would be “responsible at this point to go the extra mile.” With just two weeks to go before the end of the transition period, here is what we know about the current negotiating dynamic.
A deal is more likely than official statements indicate. Without a doubt, designing a trade agreement is difficult, but compromise is frequently easier to find in multidimensional negotiations than binary negotiations. This is because there is usually a mutually agreeable combination to be found amid the give and take across multiple factors. Moreover, official statements are likely more for domestic audiences than a true update on each side’s respective position.By taking a hard line and drawing it out to the last moment, each side can claim it squeezed out every possible concession. A last-minute deal also reduces the amount of time each side’s legislative body has to pick apart any proposed deal. Keep in mind that from a rational point of view, accepting an outcome that allows for free trade, even if it can be revoked under specific conditions, would be preferable to an outcome that removes free trade from the start.
Negotiations are more complicated than a binary deal versus no deal. Details matter, but they are often overlooked. For example, how trade agreements handle synergies across sectors is a very important aspect. Because of this, the gap between a good deal and a bad deal is often greater than the gap between a bad deal and no deal. Given the complexities of Brexit talks, it will take weeks, if not months, after the fact to determine what kind of deal has been reached by the U.K. and EU, assuming they reach one.
Jan. 1, 2021, will bring a new border. Regardless of the outcome, goods crossing the U.K.–EU border will be subject to standard import-export checks, and businesses will be faced with a new set of administrative burdens. This means that many of the disruptions of a no-deal will be expected in the case of a deal. The core difference between the two outcomes is whether or not tariffs and quotas will be applied. It is also reasonable to argue that a deal outcome would allow for better cross-country cooperation to help mitigate new disruptions.
Brexit with or without a deal will be hard. The type of Brexit pursued by the British government is one of the hardest available. A free trade agreement merely reduces tariffs and quotas. It does not remove the existence of a border that makes trade materially less effective and more costly. This is why a deal outcome is still seen as an inherently negative resolution. Making matters worse is the negative COVID-19 shock that only amplifies negative Brexit ramifications.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
A bipartisan group of lawmakers will introduce the full details of its $908 billion fiscal stimulus package. The expectation is for this bill to be split into two parts: one for $748 billion that includes everything but state and local aid and liability protections and a second one for $160 billion that covers these protections. In essence this format separates the problem areas, but it remains unclear if Democrats will go along with this.
The Senate passed a stopgap bill that will keep the government funded through this Friday and allow more time for talks to continue on the spending bill and pandemic relief. Notably, the House and Senate passed the defense bill by veto-proof margins. The cooperation shown on the defense bill bodes well for the 11 other spending bills that need to be passed and combined together into an omnibus spending bill.
The Electoral College meets today to officially elect Joe Biden as the next president of the U.S.
On the virus and vaccine front, the FDA is expected to make its decision on the Moderna vaccine this week. Along the same lines, Singapore approved use of the Pfizer-BioNTech shot. In terms of restrictions, New York City will stop indoor dining today, and Germany has strengthened its lockdown measures.
Eurozone industrial production expanded 2.1% month over month against expectations for a 2.0% increase. At the country level, growth was strongest in Germany, followed by France and then Italy. From a demand perspective, auto demand from China was notable, but overall growth was fairly broad based.
China is taking measures to limit the surge in commodity prices, particularly in regard to iron ore and coal, China’s two largest imports from Australia. Strong demand in these two areas has helped offset hits to Australia’s agricultural sector from Chinese tariffs stemming from the tensions between the two countries over the origin of COVID-19.
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