VACCINE WARS & CURRENCY WARS
MARKETS WEIGH UP VACCINE WARS & CURRENCY WARS The mood in markets has become more ‘risk off’ over the past week. Concerns about the speed of the Covid-19 vaccine rollout, particularly across the EU, has soured the mood. The slow rate of progress across the bloc has led to criticism of producing companies by member governments and threats of restraints on vaccine exports. That, in turn, has fuelled concerns in the UK and the US, both of which have initially made more progress in vaccinating, even though their governments have said that vaccine supplies should not come under threat.
Against this background, global equities seem to have had their worst week since October. Other market moves, however, have been more minor. Government bonds appear to be rallying, helped by comments from the Federal Reserve that an early tapering of asset purchases is not on the cards, albeit they have subsequently slipped back. The ‘risk off’ environment has also not given much support to the US dollar, which seems to be ending the week almost unchanged against the Euro and down versus Sterling. Some European Central Bank policymakers have expressed concern about the Euro’s strength and have said that markets are underestimating the ECB’s ability to take action, including possibly cutting interest rates.
US Fed Chair Pow ell noted this week that economic activity has moderated, primarily in those areas most affected by the pandemic. The BoE may echo those comments next week. US Q4 GDP data show ed the economy still gro ing but at a much slow er pace than in Q3. Near-term risks for most economies still seem skew ed to the downside given severe restrictions still remain in place. The picture for later this year remains much more optimistic but very much remains dependent on the vaccine roll-out. So vaccine news will remain a key focus for markets as they continue to weigh up these conflicting forces.
BANK OF ENGLAND TO GIVE AN IMPORTANT UPDATE
Next Thursday’s policy update from the Bank of England’s Monetary Policy Committee will be a key focus for UK financial markets. This will also be one of the occasions when the Bank updates its forecast and issues its quarterly Monetary Policy Reports. We expect that monetary policy will be left on hold for now, maintaining Bank Rate at 0.1% and the target level for asset purchases at £895bn.
The MPC may want to hear what Chancellor Sunak has to say about fiscal policy in his 3 March Budget speech, and in particular, whether the furlough scheme w ill be extended beyond the end of April before deciding on further action. They may also feel that further stimulus may have little impact while much of the economy is still in lockdown. In the meantime, the Committee will have to confirm the weekly pace of asset purchases for the immediate future. Maintaining them at £4.4bn per w eek would mean that the current tranche will last until September which gives the MPC ample time to decide what to do next.
Plenty has happened since the BoE last updated its forecasts in November. On a positive note, it w ill report that last year’s fall in GDP - while still very large – is likely to have been less than previously expected. However, the current lockdown, which now seems likely to last for most of the quarter, means that GDP will probably fall in Q1 whereas the BoE was previously forecasting a rise. That suggests they will have to cut their GDP forecast for 2021 unless they now forecast a substantially faster recovery over the remainder of the year.
There are some grounds for doing so, given the vaccine roll-out but uncertainty about the timetable means the BoE may be reluctant to go too far down that road. What MPC members may feel more confident in saying is that the they are now less concerned about the downside risks for the economy and possibly also that the outlook further out now looks more promising. That seems consistent with recent comments from Governor Bailey. However, they may still sound a note of caution on the potential longer term damage to the economy from the pandemic.
The BoE is also due to provide an update on their recent discussions with banks about the feasibility of a cut in Bank Rate below 0%. Recent speeches by various members suggest that the MPC may be divided on its potential effectiveness. Some of the external members see it as an effective tool in boosting the economy, while Bailey and some of the other internal members are seemingly more concerned about the potential negative effects on the financial sector. Even if next week’s report concludes that a move below 0% is technically possible, it is likely to highlight that the financial system would also need time to prepare for such a move.
US EMPLOYMENT AND EUROZONE GDP IN FOCUS
The coming w eek’s UK data calendar is very light, Bank lending data for December will be watched for signs that the housing upturn is continuing. ‘Final’ January PMI readings for manufacturing and services are not expected to be revised. The preliminary readings w ere down from December and w ere consistent with a decline in GDP. The Construction PMI is a first reading for January and is forecast to have slipped to 53.0 from 54.5 in December.
The calendar elsewhere looks busier with two releases standing out. In the US, employment numbers for January w ill be watched for a second-consecutive decline after they fell in December for the first time since April. That was driven by slippage in sectors most impacted by social distancing. We think the fall probably exaggerated the weakness of the labour market but only look for a modest (80k) rise in January. In the Eurozone, Q1 GDP seems likely to post a decline. Already released figures, showed French GDP fall less than expected in Q4, while Spain and Germany posted rises. However we still look for a 0.7% drop.
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