Good morning,

The dust has settled on the budget from Wednesday and its safe to say that there are mixed feelings about it.  One thing that a lot of commentators agree on is that it is a bit light on the long term fixes that many had hoped for.  Green initiatives – which have an impact on climate change, employment, technology development and infrastructure – were largely left down to the private sector, with the free ports apparently offering enough in the way of tax breaks for them to attract this kind of investment.  The new ‘super deduction’ which rewards business investment with a 130% tax break seems to have been reasonably well received, though given that this is going to provide an incentive for business to automate, there really should have been more in the way of long term thinking and jobs planning.  There has been some pushback form the IFS, who have called it a budget of two halves – the first being the continued financial support, which they’re happy with.  The second being the tax rises and spending cuts, which they say are less clear cut in terms of benefit.  Their summary is here.

Another area of controversy for the British government is the Northern Ireland grace period, which Westminster has unilaterally decided to extend until at least October 1st.  This settling in period was designed to keep food supplies moving into Northern Ireland post Brexit whilst processes bedded down, but so far that hasn’t happened and if the agreement were to come to an end on March 31st , as planned, then food shortages and wide scale disruption would be inevitable.  The UK government has been lobbying the EU for a 12 month extension, but as that hasn’t materialised, they’ve gone it alone – much to the ire of the EU, who are calling this another example of the UK being an unreliable partner.  The EU has threatened legal action, but we’d expect this will be brought back in line with a rolling three month extension, or similar, that both sides can agree on.  It’s not in either party’s best interests to let things fall apart so swiftly and Northern Ireland won’t want to be stuck in the middle (though sadly, they don’t seem to have much of a voice in the matter)

EU controversy comes from Italy, who have barred an export of 250,000 doses of vaccine to Australia.  Using the laws that were agreed by the bloc in January, Mario Draghi’s new government has prevented the product, which was manufactured in Italy, from leaving the country.  Again, you can sort of validate the argument from either side, with Italy in dire need of getting things rolled out and Australia doing a better job than almost any other country in managing covid.  Though Australia has a contract with the manufacturer and it shouldn’t be that another country can block it.  In the scheme of things, it won’t make much difference to Australia, as they’re ramping up their domestic production of vaccine, which will account for more than 95% of their initial requirements.  However, this isn’t a great PR exercise, particularly as it’s the AZ vaccine that’s being blocked and there are millions of doses of that sitting unused elsewhere in Europe, as other countries had chosen not to give it to the over 65’s (something they’ve mostly now changed their minds on).

Russia has been sanctioned by the US because of its actions against Alexy Navalnay.  The Biden administration has mirrored sanctions imposed by the UK and EU which mostly target diplomats and Putin’s inner circle.  There is talk that they might be willing to go further and place sanctions on Russian sovereign debt, which would significantly harm the country’s access to global markets.  The move has previously been touted, but shied away from because of the disruption to global capital markets.  This time round might be different though, as central banks are acting as market makers in all the major sovereign bond markets, so they could probably mitigate any fallout quite easily.  Bloomberg has more.

In the US:  The stimulus round is getting closer, as the Senate has voted to start debating the proposal.  Even the vote to get the debate started was a dead heat, for which Kamala Harris had to cast the deciding vote, so we can see that Joe Biden’s dream of getting cross party consensus during his term isn’t going to start anytime soon.  The bill could clear this weekend, but given the dead heat it would only take one reluctant Democrat to slow the whole thing down, or demand last minute concessions to fall into line.

Fed chair Powell spoke yesterday and it was enough to send the markets into retreat.  Mr Powell said that the Fed would wait out any rise in inflation and continue on the current path of low interest rates and monthly asset purchases.  This was the Fed’s last chance to speak before they go into a blackout ahead of the rate decision and his comments set the tone for what will ultimately be a dovish Fed meeting later in the month.  This would normally be a good thing, as markets like easy money, but they are starting to get a little concerned that things might be a bit too easy.  This led to a sell off in government bonds, which pushed prices down and as such yields higher, in doing so this then led to an equity market sell-off and stock markets in the US are now trading at exactly the level at which they started the year.  As always, when America sneezes the world catches a cold and this bond market move isn’t just isolated to US government debt – UK gilts have risen sharply over the course of the last six weeks and are now back to 2019 levels, and even Germany’s yield is getting less negative by the day.

This leaves us with a bit of a predicament as we head into today and the US non-farm payrolls number.  Usually a good payrolls print is greeted warmly, but given we know the Fed is going to carry on its asset purchase programme and the government is likely to pass a massive stimulus deal this weekend,  a strong payrolls number might actually be too good and leave investors with amplified concerns over where inflation is heading and this sell-off could continue.  Conversely, the market might just see yesterday’s drop as an opportunity to get in and buy some more, so we’ll just wait and see how this plays out.

Have a great weekend.


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