Good morning,

It wasn’t the best of days for the Pound yesterday, as confirmation that the EU is going legal over Westminster’s unilateral extension of the Northern Ireland protocol took some of the wind from its sails.  Though the legal action has begun, there does seem to be a conciliatory tone in the words of Commission vice president Maros Sefcovic, who said “the UK must properly implement (the protocol) if we are to achieve our objectives.  That is why we are launching legal action today.  I do hope through the collaborative, pragmatic and constructive spirit that has prevailed in our work so far on implementing the withdrawal agreement, we can solve these issues in the joint committee without recourse to further legal means”.  We’re not sure what the UK government’s position on working collaboratively with the EU is at this point and we wouldn’t be surprised if they’re not sure what it is either.  The Times has a good article over the weekend from Irish foreign minister Simon Coveney about the current state of the relationship.

The move lower in the Pound as a result of legal action was actually offset somewhat against the euro as news of more countries in the bloc suspending the AZ vaccine came onto the wires.  The suspension is due to some data on blood clots occurring in a small number of recipients, which has led to a further slowdown in vaccine rollout efforts.  The European Medicines Agency is set to hold a preliminary meeting on the subject today, but France, Germany, Spain and Italy have all said that they won’t resume AZ vaccines until the agency investigates, which doesn’t sound like a process that will be over quickly.

European finance ministers agreed yesterday to continue their financial support policies throughout 2021 and into next year as required.  Their pledge of support will be broadly welcomed and they’re in a position to keep tapping the markets for funds because the ECB has said that they will increase the pace of their asset purchases to keep a lid on bond yields.  The tough reality is that if they can’t get their vaccine rollout up to speed then they’re going to be burning more cash than they otherwise would and also risk missing out on another summer of tourism.  Debt in the bloc is set to rise above 100% of GDP as an average, but if you strip Germany out of that average then they’re already well above that watermark.  The ECB has said that they’re only going to accelerate the pace of bond buying and not extend the overall size of their support package, we’d be surprised if they didn’t have to revisit that statement later in the year.

Staying with central banks:  We heard Andrew Bailey on the radio yesterday saying that “we have seen some increase in interest rates over the last month or so, as have other countries. My assessment so far is that that is consistent, I think, with the change in economic outlook”.  His words come a few days in advance of this week’s monetary policy meeting and are a precursor that show he’s not likely to be playing the role of arch dove at the post meeting press conference.  His economic view is pretty positive and thinks output could be at pre-pandemic levels by the end of this year, which would be an impressive rebound.  It’s Andrew Bailey’s one year anniversary in the job and what a year he’s had!  That’s not to say his job is going to be too much easier in the months and years ahead and the FT has a good article on what he’s got to ‘look forward’ to.

The UK government is set to announce “the most radical reassessment of Britain’s place in the world since the Cold War” today.  The foreign policy review covers Science and technology; the international order of the future, security and defence; and building resilience at home and overseas.  The Times has seen a leak of the document and has a pretty good rundown of what to expect (deeper ties with China, despite them being the biggest state threat.  An increased focus on the Indo-Pacific region, continued reduction in overseas aid to help square public finances, an increase in nuclear warhead stockpiles) the PM will make the full announcement later today.

Across the Pond, Joe Biden is wasting little time in getting his policies in place, with tax being the next item on his agenda:  He’s apparently looking to raise corporation tax from 21 to 28 percent, whilst increasing income tax on those earning $400k or more.  The plans are said to follow his campaign promises, which would see the top 1% lose about 11% of their after tax income, whilst the top 5% would on average see a reduction of 1.3%.  The increased revenue isn’t being used to pay down debt, but to enable the president to spend money on infrastructure projects, investment in onshoring manufacturing jobs and increase social security.  We’ll hear more about this all in the coming weeks but Bloomberg has a good article on what to expect and how the president might go about getting this done, with understandable objections coming from across the aisle.

Looking to today, we’re not expecting the busiest of sessions as it’s the Fed meeting tomorrow and that will be the biggest of the market events this week. That said, we’ve got US retail sales numbers out for February and we feel like that might get some extra attention, because if it’s a strong print for last month and we’ve got stimulus cheques in the post, markets will be wondering just how hot the economy is going to get in March and the months ahead.

Be well.

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