Crunch time for Brexit as Airbnb flies high on its stock market debut

The British prime minister warned on Thursday that there is a real possibility that the UK will leave the EU without a trade deal on 1st January. If this happens then the EU and the UK will revert to WTO trading rules, a.k.a. tarifs on exports and imports. While there is still time to get a deal done, if one is not agreed by Sunday then the markets are likely to think that a deal is impossible and that may give us some insight into how UK asset prices will react to the prospect of having no trade deal in place with our largest trading partner. Politics aside, the other big news of the day is the Airbnb IPO news. On its first day of trading it doubled its opening price, bagging its founder $11bn in the process. 

Why fishing is such a big deal between the UK and Europe 

As we move into the final weeks of the year, the UK and Europe are in the throes of contingency planning for a  no trade deal Brexit at the start of 2021. While the rhetoric from both sides has deteriorated after the British PM met the head of the European Commission on Wednesday night, both sides have agreed to more negotitaions, so we could see Sunday’s deadline to reach a deal get pushed out yet again. The sticking point remains fishing. Some may ask why does fishing, which is approx. 0.1% of the UK economy, have such importance in these negotiations? We believe it is purely symbolic. Fishing and trawler rights were at the centre of the Factortame law case back in 1978, this was the first time that the European Court of Justice ruled that European law could overrule UK law that had been passed by the UK parliament. Thus, fishing rights have always been a sticking point in the UK and the EU’s relationship, and it’s why neither side is willing to back down as the UK readies to leave the EU completely on New Year’s Day. 

Why the FX market remains optimistic about a deal 

Wrangling and threats aside, we still think that there is a chance that a deal will be done. Both sides have to look like they have the upper hand and are willing to walk about from a deal. However, there is a lot at stake – 2% of UK GDP in 2021 for starters - thus we could be closer to a deal than any politician is currently willing to let on. GBP has been one of the worst performers in the G10 FX space this week due to the ongoing tensions between the UK and the EU. GBP/USD is currently $1.33, while this is a 2% decline on the week so far, if FX traders thought that there was a more than 75% chance that the UK would leave the EU without a trade deal, we believe that GBP/USD would be closer to $1.25 at this stage, notwithstanding the recent bout of dollar weakness. Thus, the FX market could be calling the politicians’ bluff. However, this is where the next few weeks for GBP could get sticky. If the UK does leave the EU without a trade deal then we could see a dollar short squeeze and a sharp reversal in GBP/USD. However, if there is an 11th hour deal then we may see GBP surge above $1.40. We think there is a 50/50 chance for either outcome, but how the negotiations develop over the next few days could change our mind. 

The ECB’s half-hearted attempt at more QE 

The ECB meeting met expectations. More QE was announced to the tune of EUR 500bn, however there was no monthly target for purchases and ECB President Lagarde said that the full bond buying facility did not have to be used, and that it could be recalibrated if necessary. The ECB has chosen to extend its asset purchase facility at the same time as a Covid vaccine is being rolled out in the UK and across the world. Thus, they have given themselves a way out if the Eurozone economy recovers in the first half of next year. Hence EUR/USD was higher on Thursday and is currently trading just around $1.2140; there is still the possibility that this pair could break above $1.22 in the coming days. Key medium-term resistance is now $1.2470 – the high from 2018. 

Is Airbnb’s IPO justified?

Elsewhere, animal spirits are running high, Airbnb’s IPO was extremely well received and its opening price had doubled by Thursday’s close to over $144 per share, which is three times the $44-50 range that the company had predicted last week. This values Airbnb, which is loss making, at $84bn, which is more than double the market capitalisation of the Marriott group of hotels. Is this exuberance, or is there a reason that demand was so strong for Airbnb and much higher than what was expected a week ago? We think that while animal spirits are at play, there is also a method to the madness. The travel sector is likely to open back up next year, and Airbnb could benefit from people wanting quiet and more private accommodation in the years after the pandemic has passed. Added to this, the cost base for Airbnb is significantly lower than for hotels, which could also make it a strong play if there is a longer period of unemployment and economic malaise around the world. Overall, I do not understand the appeal of staying in someone else’s house, I am a hotel girl, so I will have to get my head around the fact that the market believes more people will flock to Airbnb than ever before. I can accept it, but I don’t understand it, so I am sitting on the sidelines for this one. However, there could also be an element of investors not wanting to miss out on the fun after DoorDash had a spectacular IPO on Wednesday. It is getting to the end of the year and some traders and investors will be looking to make as much profit as possible. When I look at Airbnb’s stock market debut from a purely speculative perspective then its price frenzy makes a bit more sense. 

Overall, watch Brexit talks and volatility in GBP at the start of next week, also keep an eye on the Airbnb share price. I would be amazed if it finishes the month at the current highs, but what do I know…