Good morning,

European politics and a strong word from the ECB seem to have got the better of the Euro for the time being, with a noticeable decline in its strength in the past few sessions.  This started last week with ECB members saying that interest rates weren’t necessarily as low as they could go and continued this week as Italian politics moves from messy to ugly:  Previously PM Conte was looking like he could cobble together a minority government, but that bid has failed andd has led to the president summoning Mario Draghi for a meeting – which in turn has led to the 5-Star party (parliament’s largest party) saying that they wouldn’t back a government led by Draghi.  A government of ‘national unity’ might not be an ideal for 5-star, but the alternative might be a snap election, which couldn’t come at a worse time given the intensity of the pandemic.  However, putting together a technocratic government might be too difficult a task even for Mr Draghi, given the amount of noise being made against it.  Most of the press are referring back to the former head of the ECB saying he would do “whatever it takes, and believe me, it will be enough” back in 2012 when talking about the Euro area debt crisis, this time the challenge may be domestic but it is definitely none the smaller.

The Pound lost a bit of ground to the Dollar yesterday, but in the scheme of things isn’t doing too badly at all.  The vaccine progress is helping the cause and news yesterday that the Oxford vaccine reduces the spread of covid was widely welcomed.  Data show that the fist jab gives sustained protection of 75% and also reduces transmission by 65% – the former is great news for the government and their 12 week strategy, the latter is just good news full stop. Of course the efficacy against variants is another thing and there are concerns that this drops quite significantly against the Brazilian and South African strains, hence the government mandating door to door testing in various postcodes in the UK where these strains are popping up (something about closing stable doors after horses bolting?)

The UK government is leveraging the opportunity presented by the EU’s mistake in trying to invoke Article 16 and a hard border between Northern Ireland and the Republic.  Michael Gove spoke yesterday in the Commons to urge the EU to work with the UK more swiftly to solve the border check issues that are seeing super market shelves in Northern Ireland empty of certain products.  The issue is arising with goods coming in from Great Britain, with checks and processes too cumbersome to allow an efficient supply chain.  This comes despite a three month grace period, which we’re currently in, where things should be easy.  Mr Gove’s step up in urgency is in acknowledgement that these aren’t ‘teething problems’ any longer and more robust solutions need to be found.

Over in the US:  Amazon’s stellar earnings numbers also came with another surprise;  Jeff Bezos is stepping down as CEO.  The company founder is going to move to an executive chairman role, which will see him spend more time looking at what else he and the group can be investing their cash in.  The move coincides with the milestone of $100bn in quarterly revenues being broken over the last quarter with $125.5bn in the last three months of the year, that’s up from $87bn the year before.  Interestingly, those Q4 2019 results sent the market cap of the company through a trillion dollars – a year on, it’s now 1.7 trillion dollars!

Janet Yellen is urging Congress to get on with delivering a stimulus package as new forecasts show that even with one employment numbers won’t be back to pre-pandemic levels until 2024.  The Treasury secretary has also been talking to the chief of the IMF and fostering a much warmer relationship than her predecessor left her with.  Apparently the conversations between Ms Yellen and Dr Kristalina Georgieva, MD of the IMF, covered a lot of mutual ground including the possible issue of more Special Drawing Rights.  SDR’s can be thought of as the IMF’s currency and increasing the allocation of them would be like the IMF undertaking quantitative easing, which would be to the benefit of many countries across the world.  This was previously shut down by Steve Mnuchin, treasury secretary in the Trump administration.

We’re seeing the Aussie and New Zealand dollars continue to strengthen as their economies benefit from being largely covid free.  Really good employment numbers out of NZ this morning pushed the Kiwi higher and also quelled any market hopes of a rate cut in the near future.  The Australian central bank acknowledged earlier in the week that the strength of their currency influenced their decision to keep quantitative easing on the go at its current level, rather than taper it and risk further AUD strengthening. This theme might be something that starts to emerge with the British Pound if the divergence between the pace of our vaccination programme and the EU’s continues, because we’d theoretically be up and running again that much quicker, albeit there are risks that this won’t be the case, but it is something to watch out for.

Today we’ll be looking at European inflation data, as well as services numbers from the UK, Europe and the US.  Those numbers are backward looking, so we do think that Italian politics is possibly a bigger driver of the Euro in the short term.

Be well


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