12 November 2020: Sunak pressured to hike tax

Sunak pressured to hike tax

12th November: Highlights

  • Pace of recovery still uncertain
  • Economy in better condition than 2008 but concerns remain
  • Lagarde contradictory over vaccine rollout

Doubling of Capital Gains Tax being promoted

Having extended the Government’s furlough scheme until next March, Chancellor Rishi Sunak’s attention is turning to how he is going to pay for his generosity.

In the past, faced with either cutting services or increasing taxes, a Conservative Government would have chosen cuts. However, in order to comply with Boris Johnson’s pledge to increase Government investment in infrastructure, the NHS, and local Government, Sunak is planning to take a most unconservative path and raise taxes.

To go against the grain even further, it is Capital Gains Tax that is first in his sights. This is the tax that applies to the profit made on the purchase and sale of an asset and is something that applies far more often to Conservative than Labour voters.

A Government review of taxation has suggested that the rate of Capital Gains Tax should be doubled. Even this measure would bring in a relatively small proportion of the additional borrowings the Government has undertaken but is seen as symbolic of the Government’s commitment.

With the country having been under what appears to be lockdown lite, with rules about what are essential outlets more than a little blurred, for a week, it will be at least another two before evidence can be produced that backs (or otherwise) the Government’s action. With deaths from the virus considered a lagging indicator, it is the level of infections that is being more closely monitored. Rather optimistically, there are reports that a levelling off is already beginning.

The pound is being driven by so many factors currently, mostly positive, that it is difficult to discern how long its current rally versus both the dollar and euro can continue.

While the creation of a vaccine that works in over 90% of cases is a major, possibly game changing breakthrough, the markets will be craving more information about when it will be delivered to remain bullish about its possibilities. Similarly, bullishness created by vague rumours of progress in Brexit talks will also fade unless something positive emerges.

The pound reached a high of 1.3313 versus the dollar, but similarly to the previous day, it fell back to close at 1.3216 as concerns over the sustainability of the rally set in. The rally versus the single currency appears a little more solid against the euro with the pound reaching its highest level since May, closing at 1.1219.

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Employment and Relief Funding still hold the key

Lost in the frantic activity that took place in the final few days before the election, the creation of a Pandemic Relief Bill is now by far the most important barrier to progress for the U.S. economy.

While President Trump builds figurative barriers to fight against his physical removal from the White House, the adage that even if you tell a lie over and over it does not become true comes to mind.

The Republican rumour mill is being cranked up a few notches. Stories are emerging of Trump ballots being removed and discarded by Democrat supporting vote counters.

This has been ridiculed by a survey of both Democrat and Republican adjudicators in several States who have confirmed that everything about their vote was both legal and transparent.

It is hard to see this growing fiasco ending without recourse to the Supreme Court. Trump clearly is still in no mood to concede, while Biden’s patience and calm demeanour cannot go on much longer.

The longer the country simply accepts this status quo the more likely it is that the issue will take to the streets and with Trump controlling Federal reaction to any riots or violence, the situation could boil over very quickly.

Despite this threat, asset markets have been climbing since the announcement making Biden President Elect and news of an effective vaccine have added a turbo charge.

Nevertheless, the longer a Relief Bill takes to see the light of day, the greater the concerns of the Federal Reserve will be that the length of the downturn is extending unnecessarily.

Responsibility for the creation of terms that will satisfy both sides will most likely fall on Nancy Pelosi and it will be beholden upon her to realise that the size of the funding is, for now, less important than getting a Bill in place.

Yesterday, the dollar index again showed that it has strong support in the low 92’s. It reached a high of 93.06, closing within three pips of the top.

Lagarde feeling a little isolated

Not for the first time and unlikely to be the last, the ability of the ECB to provide rapid reaction to a necessary course of action is being hampered by the unwieldy nature of its Governing Council.

It is more in hope than expectation that someone, possibly Ursula von der Leyen, is keeping a note somewhere of the number of changes that need to be considered once the Pandemic is under control.

The lead in to any change in monetary policy or the increase of the size of the ECB’s Asset Purchase Scheme is becoming more bizarre as intra-meeting decisions remain impossible to make.

That means that from discussion, to decision, to implementation can take up to three months to take place. That is all very well in the atmosphere of calm in which the EU Commission, EU Council and EU Parliament prefer to operate, but when there are fires to be put out, a more urgent path is both vital and necessary.

The overhaul of the entire decision-making process of the EU is needed but so far there is no one emerging prepared to shake the tree.

Until that happens the self-congratulation over the fact that Europe is able to come together in harmony, even if that harmony is due to a lack of tough decision making, will prevail.

This week’s data releases continue to point to another downturn, possibly a recession in several individual States and an overall double dip cannot be ruled out.

Yesterday, the euro appeared to be coming to the end of its recent strength. Seemingly now unable to hold on above 1.18 versus the dollar, it fell to a low of 1.1745 but recovered a little to close at 1.1780.

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.”