NI Protocol and Dollar Index in Focus

This weekend headlines continued to circulate over whether an agreement could be reached over amendments to the Northern Ireland protocol in order to help alleviate recent political stalemate.

In the latest developments, today, Rishi Sunak will meet President Ursula von der Leyen in England where it is expected a deal will be signed between parties. Nevertheless, many – not least within the Conservative party – remain unconvinced that Sunak will have done enough to win over the support of the DUP, and thus questions remain over whether power sharing will be able to be restarted. This comes as the former NI secretary, Theresa Villiers said this morning that any agreement should be ratified from Westminster, indicative of how the issue continues to cause internal turmoil within the conservative party.

Presently, the Northern Ireland Protocol remains in place having been ratified by the UK and EU in 2019 and allows for the free movement of goods to take place across the border between NI and the ROI. Nevertheless, given the political sensitivities of establishing a physical customs border on the Island of Ireland, Westminster and Brussels agreed to establish controls on goods entering Northern Ireland from Great Britain – a state of affairs which has been vehemently opposed by the DUP.

Such has been the DUP’s opposition to the NI Protocol (which in effect creates a customs border on the Irish Sea), the unionists have continually blocked electing a speaker in Stormont which acts as a prerequisite to forming a government. As such, the Northern Ireland Assembly has existed in a state of limbo since May 2022, severely limiting legislative or executive functions there. Hence, it is hoped that an amended deal which is gathers stronger bipartisan support could allow for NI Assembly to resume its functions.

As such all eyes are now on the Sunak and von der Leyen’s meeting and whether negotiations will yield an amicable deal that will allow for power sharing in Stormont to continue.

As equities dipped on the prospect of a hawkish fed (and a market view that the terminal rate would reach circa 5.3%), US sent treasuries continued to rise on Friday. Here, the US 10-year yield rose to 3.94% – just shy of its highest level since November. Meanwhile, the two-year (which is more sensitive to short term hikes) rose 4.81% as it approached levels not seen since November, which was itself the highest the 2-year has been since 2007.

Focus on the Fed’s next move in March has put further pressure on equities this morning with Asian stocks falling on the week’s open. The S&P 500 ended Friday over 1% lower while the tech heavy Nasdaq and Dow Jones also lost 1.7% and 1% respectively. European shares also ended in the red, with the Stoxx 600 falling 1.04%. This came as Friday’s data release showed that US consumer spending rose by 1.8% in January. Given that consumer spending accounts for two-thirds of US economy activity, the print suggest that the Fed may have to raise rates to keep a lid on demand driven inflationary pressure. Such sentiments were also bolstered by PCE coming in 0.4 percentage points above expectation for January on an annualised basis.