The Dutch economy has been largely shut down for five weeks. Covid-19 measures are also being tightened in many other European countries. Less than a year ago, the announcement of a partial lockdown would undoubtedly have caused great turmoil in financial markets. This time investors shrugged their shoulders and continued buying shares. In the Netherlands, the AEX is just slightly higher than at the end of 2019. And currency markets are also showing well that traders currently have little regard for risk. Safe havens, such as the dollar and the Swiss franc, are losing some ground against the euro, among others, in recent weeks.
Vaccines and state aid as panacea
There is a good reason why financial markets pay little attention to the economic impact of new lockdowns. In fact, there are two. During 2020, it became clear that governments and central banks pulling out all the stops to keep the economy on track. For example, through benefits higher than the last salary, or by turning on the credit tap. The second reason is that there are different vaccines which will be launched in the new year. So it is only a matter of time before lockdowns and other preventive measures are no longer necessary. Before the end of 2021, the economy will be fully self-sustaining, if everything goes somewhat as expected.
Unexpected twist
The latter is less obvious than it sounds. The Covid-19 outbreak is a very good and recent example of how everything can turn out differently than you think. And then there are other visible risks that can upset the balance of the market, such as the brexit. Confidence in a good outcome has increased considerably as negotiations have not yet been cut short. But there is a good chance that tensions will rise again towards the turn of the year. British Prime Minister Boris Johnson is trying to sell his skin as dearly as possible, while at the same time avoiding the economic malaise of a chaotic departure from the EU.
Painful teaching moment
Johnson manoeuvres like an executive of a major retail chain, preferring to his own little shop wants to have. Then he can negotiate with suppliers and set his own selling prices. But he loses the buying discounts of a large group and he has to compete on his own against some very large competitors (China and the US). The most likely scenario is that he breaks away from the parent group (the EU) with reasonable agreements just before the turn of the year. Only to find out that an existence as a small independent is trickier than he imagined. If the pound rebounds in the time ahead as a deal is reached after all, sentiment is expected to turn when the brexit pain becomes truly apparent during 2021. Because, unfortunately, the big problems after the turn of the year are not going to magically disappear all of a sudden.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
