Financial services to be the new battleground
The U.K. yesterday announced proposals which were a major concession to the EU in the area of financial services. Theresa May proposed that following Brexit, EU banks would be allowed to continue to maintain branches in the U.K. rather than being forced to turn them into subsidiaries which would need to be individually capitalized. It is hard to explain why the U.K. would make such a concession now given that negotiations over the future relationship are not due to start for another three months.
This decision was then made doubly odd by Michel Barnier who made his own pronouncement over financial services going forward.
In a policy speech he declared that there was no way the U.K. would be allowed access to the 'Financial Passport' which allows financial institutions with a licence to sell financial products in one EU country to do so in all EU countries. He said that there is not a single trade agreement that encompasses financial services, effectively starting the stage two negotiations with a huge negative.
Powell likely to bring a whole new dimension to Fed Chair
Jerome Powell will be sworn in as the 16th Chairman of the Federal Reserve early in the New Year. He will be unique from his fifteen predecessors as he doesn’t come from a banking or economics background. He is a lawyer by trade and will bring a lawyer’s eye to the Fed’s decision-making process.
He takes over at an interesting time in economics as a new paradigm is developing whereby low interest rates over an extended period and the 'printing of money' in the form of a ballooning of the Fed’s balance sheet have not led to runaway inflation as was predicted would happen when the economy started to grow at close to trend. Another myth that had been exploded is that tightness of the labour market also drives inflation.
Powell’s academic background will allow him to take a more forensic attitude to decision making but it will be his speeches that will be of most interest. Gone will be the advance guidance of Janet Yellen to be replaced, most likely, by a more “broad brush” approach that is more related to the business world than the world of finance.
A last word
I write these daily bulletins entirely independently to allow me a platform for my views on the world of foreign exchange, monetary policy and politics.
I have no desire to encourage anyone to trade either speculatively or to hedge an exposure based upon my words. What I do want to do, however, is encourage thought and dialogue and bring a level of awareness and analysis to the crazy decisions that are made by those supposed to know better and allow us all to believe that, yes, we could do a better job than that person.
Opinion is all that matters. No one is right all the time. I used to travel with an economist to visit clients and one once told me privately “I really like it when you bring ***** to see me. He is never right about the markets, but he speaks so well!”.
Have a wonderful Christmas and a Happy and Prosperous New Year.