GBP Jumps Overnight As Leaders Go The "Extra Mile" But Can It Last?

OK, very good morning. Hope you had a good weekend. It is Monday the 14th of December. Don't forget, if you haven't already done so and if you're not yet part of our Amplify Live community, check out the link below. We've got some really great stuff coming up this week. Not only is there a lot of calendar events happening, so we've got to see how Brexit unfolds, we've got an FOMC meeting on on Wednesday night, which we'll cover. And we've also got another guest industry speaker coming in for the Masterclass series as well. So don't forget to check out that link and a free trial if you want to be part of that. But otherwise, look, let's get stuck into things and how things are playing out this morning. And as you probably have already seen, markets are up, general risk on being observed across the board. So stock index futures have gapped up in overnight trade. You've got T-notes slightly lower, gold coming down about $7 in the top right, and you've got the dollar index down just over a quarter of 1%, and cable seeing sharp outperformance, up around 121 pips and at session highs now, just breaking above the Asia-Pacific kind of range that we were trading here at around 133.46 in the sterling futures. So Why is this happening? Why is the market generally in a fairly moderate risk-on mode this morning? Well, 3 main things that we're looking at. One of the first things is with Brexit. We're going to go into the details shortly, but overall there is no worst-case scenario. They didn't hit the deadline and therefore talks are off. The opposite, they've said they're going to continue on and go the extra mile, is what they said. And so sterling benefiting from that relief, at least short term, that they're continuing in dialogue on that negotiation. You've also got the first deliveries of the Pfizer BioNTech vaccine in the US due to arrive today, and this follows then US FDA approval, which was largely as expected, but that coming through now. And then also more stimulus talks in the US, a bipartisan group of lawmakers looking to unveil a coronavirus pandemic relief bill later on today. Those three factors really the driving force of markets this morning, and as such as well, following the equity move, WTI crude futures just breaking out a little bit to the upside here, um, up 51 cents and reclaiming the $47 handle. We're just finding a bit of resistance near term at the R1 this morning. So that's the general theme. As I said, won't go through the, the charts too much from a technical perspective. We'll save that for the Amplify Live session when we have the live stream running. But let's just get into some of the news flow then. Let me get you up to speed and what exactly has been going on. I'm going to start off, of course, with Brexit. And I think pretty much in fitting with most people's expectations, we've gone from multiple different kind of deadlines that have come and gone. So the fact that Sunday was being pitched as the new kind of do-or-die moment. I don't think a lot of people genuinely believe that, but certainly the commitment to continue dialogue is what's caused this positive reaction for sterling in the initial overnight recommencement of trade. So PM Johnson and von der Leyen, the European Commission president, agreed in a phone conversation on Sunday to go the, quote, extra mile. Officials involved in the process said the agreement could be struck this week, but again, I would, uh, a kind of word of caution on, on the timing on that. However, one senior British official did say we could go up until Christmas, so a little bit further beyond than just this week. A new UK proposal floated with the EU over the weekend on the biggest outstanding disagreement and how to create a level competitive playing field for businesses on either side of the channel. Musk might just break the deadlock. That was according to 3 people with knowledge of the discussion. So away from the fishery side of things, which most people believe can be resolved actually fairly straightforward. One of the other key issues then, creating a level competitive playing field. Apparently there is also a new UK table agreement that does look somewhat more appealing for the EU side. Talks in Brussels, they recommenced this morning. Michel Barnier is to brief EU ambassadors in around half an hour's time, shooting this just before 7 AM this morning. The latest reaction then, as I said, has been one of relief in sterling, but what I would say is probably that there's not going to be any immediate, I would say, fast-tracking towards a compromise in a deal that's going to come, I don't see, at least in the first half of the week. So as we continue to get into the second half of the week and potentially beyond, I would say then what we might see is this relief now, and then the pound fades back down, and we have a similar pattern to what we'll be seeing at the end of last week. Um, so at this point in time, there is no set deadline as yet that's being put forward by either side as what is the new deadline. The only hard one that we do know of, of course, is December 31st. And actually I did put out a poll. Let's just get that up. At the weekend, I was just interested to see where our Twitter followers were in terms of the timings of an actual deal. And here it is: when will a Brexit deal be agreed? This was prior to the, the conversation coming out on Sunday. And so, so few people actually believed that they would strike a deal yesterday, only 6%. But most people And if you listen to the video that we shared on the YouTube channel with Piers, the head of trading, and I that were talking about our outlook for how this might play out, he was pretty sure that he thinks this is going to roll into 2021, so beyond that of Dec 31st. And there were a few comments out of the Foreign Secretary Dominic Raab at the weekend, I think he spoke on the Andrew Marr Show, that would be indicative that perhaps that is something being contemplated at the moment. So yeah, we could be in for a little bit more Brexit to go. But elsewhere, let's have a look at a few other things. Talking about EU and COVID, this is one of the main headlines I saw from last night. Germany will enter a hard lockdown from Wednesday, so with non-essential stores shut, employers urged to close workplaces, schoolchildren encouraged to remain at home. So a really quite stringent lockdown going to be put in in Germany. The tighter restrictions, including a ban on gatherings over the New Year, will last until at least the 10th of January of 2021. In France, the 7-day rolling average of new cases rose for a 6th straight day, topped 12,000 for the first time since November 27th. Patients in intensive care units in France increased for the first time in 4 weeks, granted, albeit death count was actually lower. Uh, for the UK, one thing to look out for on Wednesday, of course, on the 16th, we're going to get the update on the tiering system, uh, and expectations are that London will go from tier 2 to tier 3. And obviously this all comes as well with just around 2 weeks or so, uh, or 10 days until we get the loosening of restrictions for the Christmas period. So very important at the moment that that gets brought under control. So we are expecting that to happen for the, for the capital. Otherwise, elsewhere, as I mentioned, you have had the FDA in the US approve then the fast-tracking of the Pfizer-BioNTech drug, which is good because at the moment New York City, where indoor dining at restaurants and bars is halting today, so this positive rate remains above the 5% threshold marker for that type of restriction to be in place. And California's new case and deaths, though, did drop Sunday, but that was from a record high on Saturday. So the situation there still, uh, quite, quite serious at the moment across the nation. The one thing though that people are looking at which is definitely going to be more encouraging is the fact of this, which is US stimulus. And there's two different things happening here. One is a bipartisan group of lawmakers are going to unveil this latest $908 billion coronavirus pandemic relief bill today, although it's no guarantee that actually it's going to get approval. That was according to one of the main negotiators of this bill, Senator Joe Manchin, a West Virginia Democrat. A competing $916 billion relief proposal is also circulating from the US Treasury Secretary Steven Mnuchin as well. So kind of almost feels we're a little bit back of where we were at the beginning of last week. If you remember, we were, we were sat here 7 days ago and it was all about quite positive then, the progression had been made in Brexit talks and the deadline was Wednesday. On the separate side in the US, there was a lot of progression on 2 weeks ago and markets were responding, moving higher in US equities on the back of further progress in stimulus talks. And then both those issues at the end of last week did not materialize. So again, just to repeat, we feel like a little bit like we're back in that situation again. Bills might be coming to the table on the stimulus side. Will they get done is the key. It's not really guaranteed, is what even some of the main architects of these deals have said. And then with Brexit, again, short-term optimism. I just wonder how long it can last if I was looking at the week as a whole from that perspective. So that's the latest state on those things. And they all have been moderately positive this morning, as we can see. So index futures higher, oil higher, gold lower, T-notes lower. And in the currency markets, the Dixie off about 0.3% now, 1%. With the sterling currency outperforming Europe about 27 pips. Um, looking at the calendar for this week, today is very quiet in fact, so there's not really a great deal to speak of. But this week is quite busy on the data front. Just having a look at the UK to start with, and we get the October labor market report on Tuesday. It's forecast to show a further fall in employment. and a rise in unemployment rate, albeit still relatively low, 5%. If we go further forward in regards to the UK, I'll stick with that first. Wednesday we've got inflation figures expected to edge down to 0.6 in November, which would only be a decrease around 0.1. And then if we go or skip down to the end of the week on Friday, you then get UK retail sales, which may have slipped by 0.8% during the lockdown in the UK. So you've got jobs data, inflation data, retail sales metrics as well coming out the UK on Tuesday, Wednesday, Friday. Don't forget as well, for the UK, the main— or one of the main events is going to be the Bank of England. You've got the latest interest rate decision. However, what I would say with that is almost impossible really for the Monetary Policy Committee to make any real definitive change. They already increased the asset purchase kind of program, or the AFP, I think they call it, rather than APP. Getting lost with all my acronyms. But the QE program at the Bank of England, I don't see that changing. I don't see them really making too many noises towards negative rates. If you remember, there was a little bit of movement in the curve at the end of last week with the apprehension about no deal increasing. That had led as well short kind of term money markets to price in around 65% probability of a rate cut into negative territory from what was only 16% a week prior. I'd say that's probably going to stabilize quite a bit this morning just given this recommitment to talk. So for me, the Bank of England's hands are kind of tied at this point. There's no way really they can make any definitive decision on any improvements, not just because as well the fact that they've only increased the QE program very recently. So very much a, a kind of stand pat meeting, a rollover until the new year, I'd say is kind of the theme for the Bank of England. So not expecting a great deal there. But going and looking elsewhere, what else have we got? Well, let's just run through it. As I said, Monday pretty quiet, UK, the jobs data, but then you've got the Empire Manufacturing figure coming out of the US, manufacturing production cap utilization. Got the tiering update in the UK on Wednesday. You've then got the various different December preliminary manufacturing service PMIs, which of course will be an important metric to look at. That'll be on Wednesday morning. And US retail sales are also due on Wednesday afternoon, and this comes ahead of the FOMC meeting. Now for the Fed, there's a couple of interesting points here. Good article in the FT at the weekend, not sure if you had a chance to read it, but let me give you the overall general take. And of course, there's been this recent surge in coronavirus cases which is kind of grappling the US economy with further restrictions. So the FOMC, the belief is they might debate changes to its bond buying program, or at least alter its guidance around future purchases. And there's this talk about a reweighting of debt purchases towards the longer end. So moving the kind of average maturity kind of bucket a little bit longer to suppress yields in the long end. Uh, US central bankers are widely expected to approve language, um, specifying that the $120 billion per month in debt purchases launched at the start of the pandemic will continue until the recovery meets certain conditions, according to senior economists and Fed watchers. Now that might sound subtle at the moment, but The Fed says its bond purchases will continue at their current pace only over the coming months, which is a far more limited time frame than saying that they will continue doing it until the recovery meets certain conditions. So that's the kind of loosening in language, if you like, that we could be looking for in an alteration of their, their guidance around that specific QE program. Officials will also update their quarterly forecast for economic growth, unemployment, inflation, and for their target interest rate, which is expected to stay near zero through 2023. So an update on those macroeconomic projections like we had from the ECB last week. Um, and ahead of the Fed decision, then there is quite a few data points coming out throughout the week. Um, policymakers will get November data on industrial production, retail sales. You've got the flash PMI reading as well coming out. If we skip over to Thursday, you've also got the US jobless numbers coming out, which of course are going to be watched given they surged to a 3-month high last week, albeit some people were saying that was kind of pent up because of the Thanksgiving in the depressed reading we had from the pre— the week prior. Um, and with retail sales as well, that'll be another one we're looking out for from the US, um, which will be particularly interesting to watch. But the jobless one, perhaps, um, some focus given the fact that the uptick we had last week, and also the fact that given the newly in-place restrictions we're seeing nationwide, that's going to see that jobless rate continue to rise, at least in the short term. Um, Friday then, what else have we got? Bank of Japan. So there's a lot of central banks coming out. There is others actually, in fact, but we're going to focus on the FOMC, the BOE, and the BOJ, the latter of which rates like to stay unchanged despite CPI data set to show a steeper fall in prices. With the Japanese inflation metric due this week, the BOJ is also like to extend its special pandemic emergency support measures for businesses. And then finally, sticking with the, the Far East, The other, other thing to be aware of is when we come in tomorrow morning, there's a couple of Chinese metrics that we will know by then— industrial production, retail sales, investment— all expected to have strengthened in November following the recent string of positive data that we've been seeing just generally in China with the PMIs just a week ago, the export data and the trade balance figures as well. I'd expect that pattern to continue with some of these other metrics for for November. So yeah, that, that's pretty much it really. So quite a busy week, quite a bit of data coming out. As I said, today is probably the most quiet day of everything. So major things from a top-level macro perspective I'll be keeping an eye on, of course, will be Brexit and the stimulus talks, and then also any other updates on the vaccine. But on that last front, I'd say we've got a bit of a clear running at the moment. I'd say probably, um, again, just to iterate what I foresee for the week ahead is perhaps some positive signs Monday. Do we then get delivery on stimulus and Brexit? And if not, do things start to turn a little sour again, particularly if these equities start pushing up to record highs in the first half of the week? Does that leave them then susceptible to a bit of a similar move that we had towards Wednesday to Friday last week. We shall see. But that's pretty much it. So, gonna let you guys get on with things. Wish you a good day. And for those on Amplify Live, I'll see you in the chat room and on the livestream. Thanks very much.