MNI Gilt Week Ahead - December 21, 2020

• The newsflow surrounding the UK over the weekend has been largely negative. There is still no trade deal agreed with the EU (although according to some sources all that holds this up is an agreement on how long the fishing transition will be). This has now missed another deadline with the European Parliament stating last week that it would only vote on a deal this year if it was agreed by Sunday. It is widely considered that negotiations will continue at least until Christmas but things really are getting down to the wire if the sides want to avoid an accidental no deal scenario.
• The other big news of the weekend has been the introduction of Tier 4 Covid-19 restrictions across Greater London and much of South East England. These restrictions are effectively in line with those seen during the English national lockdown of November. Christmas gatherings have also been banned in tier 4 areas and throughout the rest of the country are now restricted to just Christmas Day rather than a five-day period of 23-27 December.
• However, it is the new strain of Covid-19 that is particularly concerning – it has become the dominant strain throughout London and South East England. The new strain is through to be around 70% more contagious than the original strain and is expected to raise R by 0.4-0.9 points. Note that R has never really got below 0.6 in the UK, even during the first multi-month lockdown. This means that even in an optimistic scenario, the R number would not have been substantially below 1 during the most stringent restrictions, including school closures, that we have seen, even though the first lockdown was associated with warm weather. A number of European countries have temporarily closed their borders with the UK, including France, which will disrupt already stretched trade channels ahead of the Brexit deadline. The hopes with the new strain are that the vaccine continues to be as effective and that it is no more serious if caught (other than being more contagious).
• On the data front this week we will receive the final print of Q3 GDP (including the first print of the current account balance) and an update on public sector finances for November. Both are due for release on Tuesday. There are no scheduled appearances from MPC members this week.

GiltWeekAhead21122020.pdf