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Wolf!

The final deadline, honest

Investors long ago lost count of the Brexit deadlines that have been stepped around, pushed back or moved aside. There was therefore minimal surprise when the UK Prime Minister left Brussels empty-handed last night after a fish supper with the EC President. Sunday has become yet another “final” deadline for a deal or no-deal decision.

Investors demonstrated their lack of astonishment by pushing sterling around on their plates before leaving it on average uneaten. It is 0.2% firmer – a fifth of a euro cent – against the EUR, JPY and SEK and down by a little less than that against the USD and CAD. The pound is exactly unchanged against the CHF. A pre-lunch rally petered out in the early afternoon as optimism waxed and waned about the likelihood of an agreement in Brussels, and news of the talks’ failure sent the pound spiking briefly lower.

It has become difficult to judge whether investors remain confident that a deal will be struck or if they are becoming resigned to Britain and Europe trading on WTO terms from next month. It is likely that the decision, when it eventually comes, will send the higher or lower. It is less obvious, though, how far such a move might carry it in the short term.

 

European money flows

An example of how presentation and spin could allow both Britain and the EU to claim victory came yesterday with an apparent compromise on the “rule of law” standoff between the EU and Hungary/Poland. The countries will be allowed access to new EU funds, subject to confirmation at today’s European Council meeting.

“Under the deal, the rule of law regulation making access to EU money conditional on respecting the rule of law would remain unchanged”, the diplomat said. But Warsaw and Budapest would receive assurance that the regulation would be applied objectively and could be tested before the EU’s top court before implementation. The agreement unblocks €1.8 trillion of budget and stimulus funds.

It is probable that the European cash tap will be opened wider by the European Central Bank today. A week ago, ECB Chief Economist Philip Lane hinted that new stimulus would be forthcoming and analysts are looking for an extra €500 billion to be added to the Pandemic Emergency Purchase Programme (PEPP) following the Governing Council meeting.

 

Calm before the storm?

If the latest Brexit deadline is to be believed, investors’ first chance to have their say on the result will come on Monday morning in the Far East. Until then they are unlikely to want to go out on a binary limb with their sterling positions.

They were clearly not enthused by this morning’s UK economic data though. At least, not sufficiently to stop them marking the pound down further ahead of London’s opening. Better than expected gains in production were offset by a wider than expected trade deficit. Other important data today cover Swedish and US inflation, US jobless claims and Canadian house prices. NZ house prices come out tonight. The European Council meeting that starts at 14:00 is unlikely to discuss Brexit, at least publicly.

Friday’s modest ecostat agenda brings German and Spanish inflation, US producer prices and the provisional Michigan Consumer Sentiment Index. The Bank of England will publish its Financial Stability Report and the minutes of the Financial Policy Committee. Oh, and on Sunday do not be too shocked if the latest deadline wolf turns out to be a red herring.

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