European Market Open: UK and EU test their post-Brexit relationship

European markets are expected to broadly flat this morning, as post-Brexit relations between the UK and the EU come under strain over the future of financial services and the management of the Northern Ireland protocol.

Brexit 3

  • Elsewhere in Europe, Germany extends its lockdown while Italy edges closer to finding out if Mario Draghi has enough support to form a new government.
  • Meanwhile, the presidents of the US and China hold their first phone call to discuss tense relations between the two countries.
  • In forex, the dollar has weakened following soft inflation data yesterday.
  • In commodities, oil prices take a breather from the recent rally.
  • The economic calendar focuses on European growth forecasts and US jobs data today.

FTSE 100 to open broadly flat

The FTSE 100 is set to open a smidgen higher today at 6522.8.

European markets struggle to find higher ground

France’s CAC 40 is set to open 0.1% higher this morning at 5669.4.

Germany’s DAX is called to open flat at 13942.0 today.

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BoE governor warns EU could cut UK out of financial markets

The governor of the Bank of England, Andrew Bailey, has issued a stark warning that the EU could be planning to cut the UK off from its financial markets as the two countries try to agree on terms of trade for the sector in a post-Brexit world.

Financial services were largely excluded from the Brexit deal agreed in December and the two sides are aiming to strike a deal on ‘equivalence’ – whereby each side recognises the other’s regulation – by the end of March.

However, the governor warned that the EU is trying to dictate terms to the UK and that this would not work.

‘I'm afraid a world in which the EU dictates and determines which rules and standards we have in the UK isn't going to work,’ he said during his annual Mansion House speech. ‘Is the EU going to cut the UK off from itself? There are signs of an intention to do so at the moment but I think that would be a mistake’.

‘We have to state the argument for global standards and markets and openness and if we all sign up to that then there's no need to go in that direction,’ Bailey added.

Notably, separate news broke yesterday that Amsterdam had surpassed London as Europe’s largest trading centre in January as the Netherlands scooped up business that shifted out of the UK as a result of Brexit.

The EU’s fear is rooted in divergence – the idea that the UK will seek to deregulate and change the rules it followed when it was part of the bloc, possibly undercutting the EU. That has prompted the idea that the UK could try to become the equivalent to Singapore in Asia, which is known as a low-tax, low-regulation model. Bailey said ‘none of this means that the UK should or will create a low-regulation, high-risk, anything-goes financial centre and system’.

EU claims UK has ‘shortcomings’ over Northern Ireland protocol

The EU has criticised ‘shortcomings’ in the UK over the implementation of the Northern Ireland protocol designed to prevent a hard border being created on the island of Ireland after Brexit.

The vice president of the European Commission, Maros Sefcovic, warned there was a ‘number of shortcomings preventing the protocol and our practical arrangements from delivering on the ground’. This includes inadequate border entry posts, which Sefcovic claimed meant very little checks were being carried out on the likes of livestock and plants. He also said the UK has not provided access to the EU to its IT systems.

Germany extends national lockdown until early March

Germany has decided to extend its national lockdown until March 7 over fears that new variants could derail the progress made so far.

The lockdown was due to end on February 15 but will not continue after leaders of the country’s 16 states agreed to extend. However, it is allowing some businesses to open earlier, such as hair salons, which will be able to open on March 1. Going forward, the ability of certain types of establishments to stay open will be based on the number of cases per 100,000 people.

If the rate is below 35 per 100,000 over the most recent seven day period then non-essential outlets like museums and beauty parlours will be allowed to open, but will have to shut again if the number rises. The most recent figure, however, still stands at 68.

Will Mario Draghi get the support to form a new Italian government?

The largest party in Italy’s parliament, the anti-establishment 5-Star Movement, will today hold a vote amongst its members as to whether the party should support former ECB boss Mario Draghi’s efforts to form a new coalition government.

Having delayed the original vote, an online poll will be opened at 0900 GMT today and close at 1700 GMT. The 5-Star Movement often asks its members before making big policy decisions.

Draghi was given a mandate to form a new government but is yet to secure the broad support needed. Whilst the 5-Star Movement is thought to be gradually inching towards Draghi, with the movement’s founder Beppe Grillo calling for the party to support Draghi, there are as many as 92 senators within the party that remain against teaming-up with him.

Where next for the US-China trade war?

President of the US Joe Biden and his Chinese counterpart Xi Jinping have held their first phone call since the former entered the White House.

While US relations with China deteriorated under Donald Trump, his successor is aiming to keep a hard stance against China whilst also seeking a more multilateral approach.

The pair are thought to have agreed that the confrontational mood between the two countries would only lead to a ‘disaster’ for both countries, according to China. However, Biden also raised sensitive issues such as China’s ‘coercive and unfair practices, its crackdown in Hong Kong, reported human rights abuses in Xinjiang, and increasingly assertive actions in the region, including toward Taiwan’.

For China, all of these are issues that the US should not concern itself with.

One official said Biden intends to introduce new targeted restrictions on sensitive technology exports to China over the coming weeks with the aim of getting its allies to help with a coordinated approach, and that he is no rush to reverse the slew of tariffs introduced on Chinese goods by his predecessor.

Forex: Dollar weakness after soft inflation data

The dollar is currently experiencing weakness after soft US inflation data yesterday that showed core inflation was zero in January, missing expectations of 0.2%.

GBP/USD was trading 0.1% higher this morning at 1.38522 – hovering just under its highest level since May 2018. That is the result of a weaker dollar combined with the fact the pound has found support since the Bank of England floated the idea that negative interest rates could be introduced in the not-so-distant future.

EUR/USD was up 0.1% at 1.21294 this morning, marking its highest level since the start of February.

EUR/GBP was trading broadly flat this morning at 0.87560.

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Commodities: Oil takes a breather

The recent rally in oil prices seems to be taking a breather after touching a 13-month high earlier this week. Prices had benefited from the rollout of vaccines fuelling hopes of a global economic recovery this year, with what almost seems like unlimited government support propping up economies in the meantime. On the supply side, prices have been supported by three weeks of falling inventories in the US and production cuts being made by Saudi Arabia and other significant producers.

Although the picture remains supportive for oil, the breather has prompted questions about how much higher it can go in the current climate, and whether it could fall back in the near future. One fear is that the likes of Saudi Arabia may not cut production as much as hoped, which could inject significant supply into the market again.

Brent was trading flat this morning at $61.06 a barrel, as was WTI at $58.34.

The Energy Information Administration will release its latest gas storage change figures at 1530 GMT.

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Gold traded flat today at $1843 per ounce.

Silver was up 0.2% this morning at $27.07 per ounce.

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Economic calendar: key events to watch out for today

The economic calendar this morning focuses on the EU, kicking-off with a speech from the ECB’s vie president Luis De Guindos at 0800 GMT.

The EU will release economic forecasts at 1000 GMT. The data is not usually a market-mover, but it will be interesting nonetheless to see how the EU anticipates its individual economies evolving over the next two years, especially given the starkly different approaches to COVID management and vaccine distribution.

This afternoon is all about US jobs, with continuing and initial jobless claims due out at 1330 GMT.

It is also the start of Chinese New Year today. analyst Joe Perry has a look at what to expect from Chinese New Year and explains why this year is different.

Look at all the scheduled events for today using our economic calendar, and stay up to date with the latest news and analysis here.

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