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Deal or no deal?

23 October 2020

Jonathan Marriott, Chief Investment Officer

Away from the pandemic and US elections, the focus has been on trying to make deals on both sides of the Atlantic.

Last week, Boris Johnson pulled the UK out of negotiations with the European Union over a post-Brexit trade deal.  This appears to spur the EU to accept that they would have to compromise to get a deal.  After nearly ten months and numerous meetings, both sides held entrenched positions on fishing rights and the, so-called, level playing field for regulation.  Finally, some movement appears possible.  However, it remains far from certain that a deal can be concluded by mid-November, which appears to be the latest in a long series of deadlines for ending talks in time for getting a deal done. 

Even if a deal is agreed, it will need to be approved by each member of the European Union.  Let us not forget that the Wallonia region of Belgium managed to hold up the EU-Canada trade deal until it was amended to suit them.  It takes two to tango and at least the negotiators are back on the dance floor.  This helped the pound firm up at a time when the dollar was slightly weaker, as a bigger stimulus package seemed possible.  This weighed on the FTSE 100, which has a high proportion of oversees earnings. On Friday, the UK signed a post-Brexit trade deal with Japan that may lead to access to the Trans-Pacific Partnership (TPP) which includes Australia, Vietnam and Canada.

In the US, Nancy Pelosi, the Democrat speaker of the House of Representatives and Treasury Secretary, Steven Mnuchin, continue to negotiate a new stimulus package. This came after Trump pulled out of talks two weeks ago only to resume them shortly after. If they ask their banker, the Federal Reserve, the message is clearly to get a deal done and get the fiscal stimulus in place as soon as possible. The Democrats are looking to spend more, and the administration has been gradually moving higher towards them. Even if Pelosi and Mnuchin agree to a deal, it may be difficult to pass it in the Senate where the Republican leader, Mitch McConnell, has expressed doubts about such a large deal. In the middle of a fiercely contested election, it may be hard to get senators to return to Washington to pass a deal. Both sides indicated they were close to a deal, and even if it has to wait until after the election, another round of stimulus looks as if it is on the way eventually. This is broadly positive for US equities but with higher borrowing the dollar has was slightly lower and longer dated bond yields moved higher.

The toing and froing in these negotiations is adding to uncertainty for investors. The US election at the moment looks as if it will result in a clean sweep for the Democrats which is largely accepted by the market, and as a result this may not have much impact. However, a contested result would add uncertainty and make passing a stimulus package very difficult.  If this occurred, it could see a dip in markets, but we believe this would be a short-lived disruption. If there was a winner in last night’s election debate, it was the mute button, which resulted in less interruption and a clearer message on both sides, but no clear winner. Nearly 50 million have already voted (last election total votes were 128 million) and many people have made up their mind already, so this debate may have little impact.  Biden is leading in the opinion polls in key states and outspending Trump, so a Democrat victory may have little effect on markets in the short run.  If a stimulus deal is done, both candidates will take credit for it and if it fails, it is likely that both will blame the other side.

While politicians argue people on both sides of the Atlantic and the English Channel, the rest of the population would benefit from a successful conclusion to talks this week in London and Washington. We should hope that a spirit of compromise is in the air.

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