Good morning,

It was a busy evening for reserve bankers with Both Andrew Bailey and Jerome Powell speaking.  The sentiment of each has been reflected in the currency market with the pound continuing on a charge against the dollar which really took off when the Bank of England announced last week that negative interest rates were put away for a rainier day.

Bailey’s virtual Mansion House speech did little to temper the recent hawkish rhetoric.  It did however focus on a topic, which has been largely swept under the rug, access for UK financial services into the EU.  Talks which are due to wind up in March have a familiar ring to them, with the UK calling demands unrealistic and the EU in no rush to move things forward.  The sticking point for now is around equivalence.  Bailey said that equivalence wasn’t worth securing if the cost was “rule-taking pure and simple.” Giving his assurance that “None of this means that the U.K. should or will create a low-regulation, high-risk, anything-goes financial centre and system,”.

Boris Johnson’s government has been laying the groundwork for an eventual overhaul to regulation of the industry, which was largely left out of the deal signed in December.  The sector generated a 75.6 billion pounds in tax in the year to March 2020, which amounts to over 10% of the country’s tax receipts, according to a report from the City of London Corporation.

Amsterdam has become Europe’s top share trading centre.  In January, an average of EUR 9.2b worth of shares were traded each day,which is four times higher than what was traded in December.  Trading volumes in London fell sharply to EUR 8.6b.  This is the result of the ban for EU based financial institutions trading in the UK, with Brussels choosing not to recognise UK exchange venues as having the same supervisory status as its own.

In Jerome Powell’s address to the Economic Club of New York he maintained his ultra-dovish stance, still trying to dampen any expectation that monetary policy will tighten any time soon.  With the Fed’s dual mandate of 2% inflation and 5% unemployment he was able to lean on the weak payroll numbers last week and the benign CPI number from yesterday to justify his stance.  He noted that employment last month was nearly 10 million below February 2020 levels. “Achieving and sustaining maximum employment will require more than supportive monetary policy.”
It turns out Powell and Biden are aligned in this view, with the new administration rounding out the trilogy of stimulus packages: $2trn in March 2020, $900bn in Dec 2020 and $1.9trn due next month (no doubt the payments of $1.4k to individuals, can be added to the $2k they have already received and also be ploughed into Bitcoin and Tesla shares!)  The aim is to push this package through the House later this month once congress is done with the impeachment trial, with the hope that GDP will return to pre-pandemic levels by mid-2020.  Biden tweeted last night that the risk isn’t that we do too much when it comes to a COVID relief package — it’s that we don’t do enough.  We have to go big.

A significant issue with this is that while the tremendous amounts of stimulus have been bloating the equity markets, there is a real question about if or when it is going to start helping those who really need it.  The disconnect between Main Street and Wall Street keeps the door open for additional stimulus but could potentially amplify risk of financial instability further down the road when the taps are turned off.
While the market is prepared to accept this for now, and the Fed have stated it will allow inflation to run hot to help the economy along, when inflation does finally come, it has the potential to hit hard and this will be a big test of their ability to keep market expectations in check this year.  ING have stated that they see potential for inflation to push above 3.5% or even 4% by May.

Joe Biden has finally picked up the phone to Xi Jinping on the eve of the Lunar New Year.  While China may be hopeful of less scrutiny from a trade standpoint, Biden has quickly made his intentions clear, focussing the conversation on human rights issues.  The Chinese have responded publicly through its state news agency telling the US to mind its own business, saying Taiwan, Hong Kong and Xinjang issues were Chinese domestic affairs, urging the US to respect China’s interests and act with caution.

The WHO has recommended AstraZeneca’s vaccine for all adults over the age of 18, with the hope the more countries will adopt the product.  This can be delivered through its own delivery program called Covax, which will help with access for lower income countries.  AstraZeneca, which reported earnings today, has seen its share price largely unaffected by its newfound notoriety at the front of the battle to deliver a vaccine globally.

Markets have had a steady open, with the dollar remaining under pressure and futures slightly higher.  Coming up today, we have the continuation of Trumps impeachment trial, a few ECB speakers scattered through the morning and US Jobless Claims this afternoon. UK preliminary GBP for Q4 2020 is released tomorrow morning.

– This was written by a colleague and senior Options Trader,  Daniel Quigley. – thanks Dan!

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