Fixed Income Research & Macro Strategy (FIRMS) – 4X Global Research

  • While some countries, including Sweden and United states, have eschewed national lockdowns over the past nine months or so the vast majority have adopted unprecedented measures to deal with a once in a century pandemic which has so far cost almost 1.4 million lives. The strategy has invariably been a simple yet complex one – to save lives – but the tactics underlying national lockdowns have evolved.
  • When Asia-Pacific and European governments implemented their first blanket national lockdowns in February-March their goal was arguably to buy sufficient time to better understand the modalities of this virus, “protect” their national health systems and acquire vital PPE. The economic cost was on an unprecedented scale.
  • Prime Minister Boris Johnson’s government arguably had the “benefit” of the United Kingdom’s pandemic lagging that of a number of major European economies by 3-4 weeks but did little during that time. A case of precious time wasted.
  • Fast forward to today and exponentially more is known about Covid-19, PPE is in most cases readily available and health systems’ capacity has been upgraded. And yet in the past couple of months most governments have once again put their economies into some form of lockdown to cope with a resurgence in Covid-19 cases and deaths. Policy-makers are once again buying time in a short-term bid to stop Covid-19 numbers spiralling out of control and heir health systems being overwhelmed.
  • However, governments are also buying time with a slightly longer-term perspective, namely to put a lid on the pandemic until one or more viable vaccines come on line. Governments have seemingly taken the view that most if (if not all) related health questions will be answered and logistical challenges overcome…but that this will require more time. There is little doubt, in our view, that the financial, economic and social cost of current lockdowns will be very high in absolute terms. Time costs money.
  • Moreover, allowing households to socialise over Christmas – a laudable goal – amounts to “selling” a bit time. This could force governments, including in Europe, into “buying” disproportionately far more time in the new year (i.e. enforcing a third round of lockdowns), assuming that mass immunisation has not materialised by then, at great cost to the economy and society.
  • The Brexit clock is ticking loudly. The critical question remains whether the United Kingdom and European Union can reach agreement on a free-trade deal in the next week or so. The past 4.5 years suggest that negotiations will go to the wire but on balance of probability we think that a trade deal will be reached. Prime Minister Johnson has simply too much to lose.
  • Sterling’s sustained appreciation since mid-September suggests to us that markets are already pricing in a reasonably high probability of such a scenario. However, the devil will be in the details of a 600+ page trade agreement – details which corporates and financial markets may take some time to digest.

GBP NEER

  • UK Chancellor of the Exchequer Rishi Sunak, who postponed this year’s Autumn Budget till 2021, will announce on 25th November the government’s Spending Review. In effect he is buying time, kicking the fiscal can down the road. But while talented Sunak is no fiscal Lionel Messi. Driven by the negative optics of a Conservative government running a double-digit deficit-to-GDP ratio, Sunak has made clear that UK taxes will rise next year, in line with our September forecast.
  • US President Trump is fast running out of options in his long-shot attempt to turn the tide of time and over-turn the election outcome and victory of President-elect Joe Biden. Yet Trump, whose raison d’être is “winning”, may have a second objective. Helping Republicans retain the Senate and hobbling Biden’s presidency could provide him with a stronger platform should he decide to bide his time and again run for President in 2024.

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Ryan Littlestone
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