Morning Commentary: The Complexities of “Equivalence”
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
The Complexities of “Equivalence”
Share this story:
Andrew Kositkun Foreign Exchange Head Trader
The city of London will start off 2021 outside of European Union (EU) rules. While recent U.K.–EU headlines have focused on the Brexit deal — the House of Commons just voted to approve the Brexit deal with the House of Lords voting later today — it is important to remember than financial services were not included in this deal. Instead, London’s status as a global financial hub remains in question and will depend on a separate process controlled by politicians and technocrats in Brussels known as “equivalence.”
Generally speaking, “equivalence” is when Nation A accepts that Nation B’s rules are as strict as its own and allows Nation B’s companies to operating in its territory. When it comes to London, the European Commission determines whether or not nonmember’s rules are equivalent. Thus far the EU has granted two big equivalence decisions, but 28 areas remain unresolved.
This uncertainty, both regarding whether equivalence will be granted and whether it will be revoked, sits at the heart of the issue, as equivalence can be unilaterally withdrawn on short notice. Further, both the EU and the U.K. are under no obligation to maintain close ties with European Commission President Ursula von der Leyen stating that “all will change” regarding London’s relationship with the EU. As such, many institutions have already set up divisions in the EU in case Brussels withholds equivalence such as the EU did to Switzerland when talks on the EU–Swiss relationship did not go well. For the U.K.’s part, it has made it clear that it will set up its own rules that could diverge from the EU’s approach. Per comments from U.K. officials, equivalence is worth having but not at any price.
On net, it appears to be an uphill climb for the U.K. While the country has made a push for “outcomes-based” equivalence, should the working of its rules not precisely match the EU, the EU has been steadfast in its position that this is not a negotiation and that it will protect the single market’s interests. To this point, EU policymakers have been tightening rules since the 2016 Brexit referendum to give the EU greater power over derivative clearinghouses. For now, London clearinghouses will be able to access the EU post-Brexit as a result of the most important equivalence decision in terms of financial stability. However, this decision only lasts until the end of June 2022, with the EU planning a significant review that could see clearinghouses forced to relocate to the EU. With the EU in no rush to grant equivalences and the U.K. signaling its intent to differ from the bloc’s rules, expect the political gamesmanship and tensions between the two sides to persist despite reaching a Brexit trade deal.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
The U.S. dollar continues to weaken, with the dollar index (DXY) currently at its lowest levels in 2 ½ years amid thin yearend liquidity. U.S. stocks have also opened higher, with Treasuries slipping. European equities have fluctuated, while Asia’s benchmarks have mostly gained.
The AstraZeneca-Oxford COVID-19 vaccine gained its first clearance from the U.K. However, questions still remain around the most effective dosing regimen. Data from the more structured U.S. trial is due in the first quarter of 2021 and will be required for U.S. and potentially EU approval.
The Senate will begin its process to override President Donald Trump’s defense bill veto. Senator Bernie Sanders has pledged to stall this process unless there is a vote on bigger stimulus checks, as Republicans remain at odds over higher payments. It is possible that Republicans will attach higher payments to a study of election fraud and a repeal of social media laws. In essence, this would be a “poison pill” maneuver, as Democrats would not want to support the other two issues. Further, packaging all these issues together avoids the bad optics of a pure stimulus vote that likely sees all Democrats voting for higher payments while some Republicans vote against it.
The scheduled rotation within the Fed’s interest rate–setting panel makes it even less likely that we will see tighter monetary policy next year. Charles Evans, one of the most predictably dovish officials, will take over the vote currently held by Loretta Mester, a relatively hawkish official.
U.K. Prime Minister Boris Johnson should win parliamentary approval for his Brexit trade deal after securing the backing of a prominent group of Conservative hardliners. It has also been reported that European truckers are turning down contracts that would take them into the U.K. on fears of long queues going in and being unable to return with backloads. This highlights the increased trade inefficiencies that will hit the economy even with a trade deal signed.
The EU and China have finalized an agreement that will further open the Chinese market up to EU investors. This accord is expected to enter into force in early 2022.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Here's what this indicator is saying about US stocks right now. ACTIVE INVESTOR WEEKLY EDITION: January 21, 2022 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: January 21, 2022 Bollinger band stock signal Here's what this indicator is saying about US stocks right now. Read more CHART OF THE WEEK Inflation and corporate consolidation US industries have become
Now accepting scholarship apps Celebrating 40 years of service -- A loan to an innovative company -- Affording your dream home -- Mergers and a new branch in Raleigh View this email in your browser Forward to a friend