12 March 2020: Budget aims to fight virus

Budget aims to fight virus

12th March: Highlights

  • Biggest has budget spend in 25 years
  • Trump bans Travel from Europe.to U.S.
  • Recession now a certainty

Chancellors plans curtailed by virus concerns

Chancellor of the Exchequer Rishi Sunak, unknown outside political circles before the shock resignation of Sajid Javid last month, produced a budget yesterday that was designed to aid the country’s fight against Coronavirus but also threw the Conservative playbook out of the window.

Known as the Party of Government borrowing reductions and balancing the books. Sunak will oversee a rise in spending (and borrowing) to unprecedented levels as his budget was the most expansive in twenty-five years.

A double barrelled policy response of a cut in rates and giving the NHS what it needs no matter the cost provided the country with some much needed optimism as it faces the prospect of cases (and deaths) growing exponentially in the coming weeks.

The 50bop cut in interest rates which followed an emergency MPC meeting held on Tuesday, at which the vote to cut rates was unanimous, was Mark Carney’s last act as Governor as he leaves the post at the weekend.

The £30 billion plan to help with the effects of Coronavirus will help small businesses cope with staff absences as the virus spreads.

The market’s consensus view is that the Government is beginning to both make good on its election pledges while tackling Coronavirus head-on.

The UK isn’t included in President Trump’s European travel exclusion plans (see below) despite the number of cases growing daily.

The pound fell yesterday despite a generally positive response to both the Budget and the rate cut. Sunak said in his speech, there will be an effect on Growth, it may be severe, but it will be relatively short in duration.

Sterling fell versus the dollar to a low of 1.2805, closing at 1.2820.

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Travel ban hits 29 European countries

In a move the timing of which is hard to fathom, President Trump announced measures last evening to ban travel between most countries in Europe.

While it may be a sensible move in the wider context, why Europe was selected for special treatment just as the WHO labelled the virus outbreak a global pandemic, is difficult to understand. In a global sense it is just as likely for an infected person to travel from Asia to the U.S. as it is if they arrive from Europe.

The move smacks of a desperation to be seen to be doing something as his previous measures failed to receive the kind of positive response that the Chinese actions received. While the crisis is far from over, infections in China, ground zero for Coronavirus, have fallen while in the West it will get far more serious before any such situation occurs.

The travel ban hit stock markets with Airline stocks obviously most seriously affected as their passenger numbers will be decimated.

The curb on travel will begin on Friday and last for thirty days. Since the UK is not included in the bank it is unclear how it will work should passengers from Europe choose to transit through London.

The dollar fell immediately following the announcement since it had not been factored in and it will have a major effect economically in the short term. The length of the restrictions will be overshadowed by the amount of time once it ends for economies to recover.

The dollar index fell following the announcement. It has reached a low of 96.07 so far today (05.15GMT) having closed yesterday virtually unchanged at 96.58.

0.4% contraction in Q1 to be followed by 0.5% in Q2

Analysts see no way that the Eurozone economy can avoid a recession (determined by two consecutive quarters of contraction) as the Coronavirus outbreak continues to ravage Italy and grow in the rest of the region. So, the complete lockdown of Italy has failed to slow the spread of the virus. Calls for economic assistance from Brussels are being considered. The EU commission is being either stoic or blissfully unaware in the face of what’s happening around them.

Angela Merkel the German Chancellor commented yesterday that it is impossible to gauge the full effect of the virus on the economy of either Germany in isolation or the entire Eurozone. That seems a little irrelevant as all scientists and doctors involved say the effect will be very serious, possibly devastating.

It is reported that a series of tax breaks, financial support for companies and a rate cut to combat the downturn will be announced. The fiscal independence of each nation will hamper a concerted approach. Once the situation returns to normal EU leaders may start to consider Fiscal Union but by then it could be too late for the economy.

Today’s ECB meeting is likely to preside over the rate cut.

A 25-million-euro fund has been announced to assist health care systems, businesses and labour market measures is expected

If the leaked numbers are correct, they seem a little on the conservative side. The UK with a population of around 65 million announced measures valued at around £30 million while Eur 25 million for 400 million people looks a little short.

Yesterday, the single currency fell to a low of 1.1275, closing at 1.1280.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”