Brexit and pandemic define the future of the European economy

These factors will also continue to support the bond market and the search for safe havens could continue. We are facing a week with a relative easing of European government curves and a narrowing of periphery spreads vis-à-vis Germany. Spreads between Germany and the US widened, as US macro data are positive, while in Europe there is a certain amount of uncertainty, all this in addition to the new measures to restrict mobility. 

Last week closed consolidating new lows in the European debt curves, with Core bonds, which tightened strongly, deepening in the negative territory with -0.62% for the German bond and with an OAT at -0.34%. The periphery, on the other hand, consolidated levels such as Portugal and Spain, 0.12% and 0.13% respectively. Italy extended slightly +5bp from last Wednesday's lows after a two and a half week rally in which it has tightened by 25 basis points. At current levels, it seems that the market is already discounting a new impulse from the European Central Bank by the end of the year, increasing its purchase programme, which is dragging peripheral sovereign debt towards historic lows. 

From the ECB, its president Christine Lagarde pointed out that not all possible measures have been used and that the recovery of the European economy remains weak and uncertain. The services sector will be quite adversely affected by the new restrictive measures adopted in the last few days and in this context, fiscal and monetary policy should continue to grow.

Regarding the Brexit negotiations, UK Prime Minister Boris Johnson has indicated that the UK should be prepared for a no-deal Brexit break-up. EU leaders said that the UK should change its positions to make the deal possible, to which Boris Johnson replied and said that the EU refuses to give Britain a trade deal like the one it has with Canada, which is ultimately what the UK is seeking. Emmanuel Macron has stated that the EU is willing to reach a deal with the UK, but not at any price and has called for a special effort on its part to reach such a deal.

At last week's summit, EU leaders, concerned about the lack of progress in negotiations, urged the UK to agree on key areas of contention or leave the bloc on 1 January after the end of the transition period without a deal. The three main points are fair competition, dispute settlement and fisheries. Last week EU leaders also allowed further negotiations with the UK, but refused to intensify them. They also said that the ball is now in Britain's court, which provoked angry responses from London, where David Frost, the UK's chief negotiator, expressed his disappointment at these statements.

All these factors affected the value of the pound, which fell a few points against the euro in Friday's session, closing the week at levels of 0.9070. The combination of Brexit and rapidly advancing contagion, coupled with a lack of confidence in the central government, is hampering Sterling's advance. Boris Johnson has another problem to deal with internally, Covid-19 cases are rising sharply in recent weeks and his staggered policy is under scrutiny, some cities such as Manchester are being quite critical of the government for imposing such severe restrictions and are leading a protest in the north of England against confinement.

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