Market Update: Pound strengthens as Brexit talks continue

Market Update: Pound strengthens as Brexit talks continue

21st December 2020

Last Week - Key Takeaways

Brexit: Competition and fishing remain sticking points

  • The pound strengthened against the US dollar amid optimism that the UK and the EU would agree a free trade deal before the Brexit transition period ends on 31st December;
  • EU chief negotiator Michel Barnier claimed on Thursday that talks were in their ‘final stretch, but they continued over the weekend as the two sides tried to break the deadlock on competition rules and fishing rights.
  • Omnis view: UK shares ended the week flat as a stronger pound weighs on many of the companies listed on the FTSE 100 that generate a high proportion of their profits abroad. However, the pound weakened this morning following the emergence of the new strain of coronavirus over the weekend and as concerns mounted about the lack of progress towards a deal.

UK: Bank of England leaves rates unchanged

  • Following its latest meeting, the Bank of England (BoE) decided to keep interest rates on hold and maintain its current level of bond-buying, known as quantitative easing (QE);
  • The unemployment rate ticked up to 4.9% in the three months to October, while inflation (the rate at which prices rise) was slightly negative and consumer spending dropped by 3.8% in November compared with October.
  • Omnis view: Spending by UK shoppers was always likely to decline in November as the country went back into lockdown, but it held up better than when restrictions were first introduced earlier in the year. Meanwhile, the BoE expects inflation to rise towards its target of 2% in the spring when the impact of the pandemic on the domestic economy should start to ease.

US: Hopes for next relief package boost shares

  • US shares rallied as politicians edged closer to agreeing on the next round of measures to offset the impact of the pandemic on the economy;
  • The Federal Reserve (US central bank) left interest rates unchanged at its latest meeting, but it said it would continue with QE until the US economic recovery was more advanced;
  • That point does not seem imminent as consumer spending fell by 1.1% in November compared to October, the biggest drop in seven months.
  • Omnis view: The slowdown in consumer spending suggests measures taken to contain the pandemic are hampering the country’s economic recovery. However, politicians finally agreed on a relief package worth just under $900 billion in the early hours of Monday morning.

Global: Rise in business activity lifts euro

  • European shares rose and the euro strengthened against the US dollar as an early estimate published by research firm IHS Markit showed business activity expanded in the EU in December;
  • Activity also grew in the UK after November’s lockdown ended, although it slowed in the US.
  • Omnis view: The increase in activity in the UK and EU in the lead up to Christmas is encouraging, but many countries have tightened restrictions again so the final figures may not be as strong. As for the US, as we mentioned above, tighter restrictions have weighed on activity.

Japan: Central bank announces policy review

  • The Bank of Japan (BoJ) kept interest rates on hold and announced a review of its policies as figures released by Japan’s statistics agency showed inflation fell by 0.4% in November compared to October.
  • Omnis view: With interest rates already in negative territory, it remains to be seen what other policies the BoJ could employ to increase inflation to its target of 2%. The BoJ also announced it would extend many of the measures it introduced to offset the economic impact of the pandemic.

LOOKING AHEAD - TALKING POINTS

Economic data

  • Friday- Japanese unemployment rate and retail sales in November.

 

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This update reflects Omnis’ view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.