Brexit and US stimulus deals remain elusive

The two big pre-Christmas deals remain elusive. Brexit talks have hit a roadblock with only a handful of days until the deadline. The European Parliament set a Sunday deadline to see the text in order to ratify it in time. Meanwhile, Congressional leaders say they will work into the weekend to hammer out a Covid relief deal for the US. Rising optimism on both fronts has had to be tempered by the fact there is still nothing on paper.  

On the Brexit front, Boris Johnson told European Commission president Ursula von der Leyen that a deal is “drifting away from us” but one could be done if the EU gives ground of fisheries and state aid. Sterling made fresh two-and-a-half year highs against the broadly weaker USD yesterday but has lost steam and pulled back a touch since. The spot market still believes a deal is coming although odds on a no-deal have shortened in the last 24 hours. 

Meanwhile it’s a similar story across the pond as the fiscal stimulus package remains slippery. Senate Majority leader Mitch McConnell said he is no stranger "to December funding deadlines or the occasional pre-Christmas cliff-hanger". Sentiment remains positive though. US markets set fresh record highs again and European markets turned higher again this morning. The German Ifo business climate exceeded expectations at 92.1, while the expectations index also improved to 92.8 vs 92.5 expected. The Ifo noted that the confidence goes beyond manufacturers with even services and wholesalers doing well.

UK consumer sentiment rebounded the most in 8 years according to a survey this morning, indicating how vaccines are already acting to support confidence in getting things back to normal. The GfK consumer confidence rose to –26 from –33 in November. Yet retail sales fell in November as the effects of lockdowns on the economy were felt. Retail sales volumes decreased by 3.8% when compared with October as many shops were forced to close. Despite the monthly fall, overall sales remain above their pre-pandemic levels, the ONS said. 

Data was soft yesterday: US unemployment claims exceeded expectations again. Initial claims rose to 885,00 for the week ended Dec 12th, up from 862k in the previous week and ahead of the roughly 800k expected by economists. Claims remain above the level seen in 2008/09 but are down from the >6m or so we saw at the peak of the pandemic. Meanwhile, the Bank of England left rates on hold and delivered no surprises for the market. The MPC voted unanimously to keep the main lending rate at 0.1% and the stock of asset purchases at £895 billion. There was not a lot in this meeting for the market, though there was a clear signal the Bank would ease policy in the event of a no-deal Brexit.

Chart: GBP/USD off its highs struck yesterday but remains well supported as long as a deal is still possible. Asymmetric downside risks in event of no-deal.

Chart: EUR/USD tests top of the channel, path to 1.25 remains open