Good morning,
Political hardball went from zero to sixty very quickly on Friday, with the European Commission threatening to invoke a clause that would effectively put a hard border on the island of Ireland for fears that vaccines might be smuggled via Northern Ireland to mainland UK. The action was widely condemned on both sides of the channel and did something that nobody’s managed to do in a long time – unite the parties of Northern Ireland. The plan was rolled back on almost immediately, but vaccine-gate seems far from over, as France and Germany are apparently weighing up the idea of sanctioning pharma companies that may not have kept to their side of the bargain when it comes to vaccine deliveries. Though according to Ursula von der Leyen, AstraZeneca has already agreed to increase its supplies to the EU by nine million doses in the first quarter and also to start delivering them a week early, so they may have dodged a bullet for the time being.
Staying in Europe: The FT is reporting that it’s not just the UK that’s experiencing large jumps in the cost of importing goods, but that Europeans are also running into significantly increased costs as the lack of shipping containers in Asia is leading to a quadrupling of the cost of sea freight. This is hitting component imports as well as those of finished goods and is already causing availability issues with some retailers, as the costs of shipping make their products economically unviable and in other instances there just isn’t a container to pack them into. The problem is said to be hitting SME’s to a greater degree than larger multinationals, who are generally prioritised by shipping companies, with 77% of SME’s surveyed saying they are having problems.
In contrast to the UK, Germany’s economy minister thinks that they can raise the money to pay for the pandemic without hiking taxes: German state assets range from stakes in listed companies, such as the railway network, banks and airlines, to large property portfolios. These investments could be scaled back and the funds released used to reinvest into future investments that would then return money into the public purse and be able to pay for the debts, which they are currently servicing at incredibly low (read: negative) interest rates. Germany issued almost €220bn in debt 2020 and is budgeting on €180bn being issued in 2021, which are post war records. To be able to consider managing down that sort of debt burden without passing it directly onto the taxpayer is very impressive.
The market got a shock last week when one of the European Central Banks more hawkish members started talking about the possibility of their negative interest rates going lower still. Over the weekend we’ve heard from another policy maker that has said the broad consensus within the bank is that they’re more worried about inflation being too low than too high, meaning that they could indeed go further in a bid to boost it. One problem they’re having is in actually trying to accurately measure inflation, as some of the traditional measures – eating out, air travel costs, getting your hair cut – are things that people just aren’t doing at the moment. So though we think the worst of the pandemic is over, we might yet see some further policy action to try and get prices heading in the right direction.
We’ll also hear more from the Bank of England this week on their thoughts on negative rates. We’re not expecting any changes at their policy meeting on Thursday, but it is likely they’ll release their findings on whether going down this path is operationally viable. The Bank has long been talking about the possibility of such a path and has definitely being doing the groundwork for it, the question in our mind is how much of a boost would it give in the, hopefully, short time between implementing such a policy and us very quickly getting back to our normal consumption habits, post lockdown. The Bank would probably prefer to wait and see for as long as they can, particularly as the summer is going to see a surge of activity.
Across the Pond, it’s going to be a busy week on the Hill: Joe Biden is going to meet with Republicans to see if he can get cross-party consensus on a stimulus bill. He needs ten of them to back a stimulus plan for it to be swiftly approved, if not it would be a longer slower grind for his technical majority to get something passed without any support from the opposition. The problem he’ll face on trying to get a quick fix is that the Republican working group he is meeting is proposing a stimulus package less than half the size of what he has in mind. Though he possibly would be more inclined to meet in the middle to get something out there quickly and get some kind of bipartisanship built in the process. Trump’s impeachment starts next week and that process isn’t going to be a great backdrop for political unity.
Wall Street is likely in for a busy week of it too: The Gamestop trade from last week is likely to continue to flounder on, whilst the forums are now talking about retail traders taking aim at silver. The iShares Silver ETF saw almost a billion dollars in investment inflows on Friday, it’s largest single day since inception. The silver price has rallied 6% on the news, but retail investors taking on such a large market will be a tougher nut to crack than a video game shop. I listened to a great podcast over the weekend, with renowned professor Aswath Damodaran giving his take on the whole thing, which is well worth a listen if you have a spare half hour in your day.
Stocks closed January almost as low as they had started it, following a wave of risk aversion in the last week, so they’ve got a lot of ground to make up once the market starts to once again believe that with stimulus and vaccination on the horizon, they’re on a one way bet. As always, the first week of the month is a busy one from a data perspective, but given that it’s mostly backward looking, it is likely the market will choose to concentrate instead on what might be rather than what was.
Be well.
