Jobless tidal wave fear
13th July: Highlights
- Sterling and the economy in unknown territory
- Covid having a direct impact on risk appetite
- EU Leaders to meet this week as scepticism grows
Sunak’s plans could be little more than a band aid
For once the Opposition Parties contention that the measures are little more than a sticking plaster on a gaping wound could be proved to be correct.
The torrent of unemployed workers could reach three million which would put it in line with the seventies and eighties although at least then, the country was going through a major realignment. At that time, the mines were on their last legs and vehicle manufacturing was becoming a niche rather than prime industry.
What the UK could see in coming months may be beyond the wit of any Government to deal with and no amount of cut-price meals or other freebies will even scratch the surface.
There is already a rumour that several major employers won’t be taking up the Government’s offer of a retention bonus of £1,000 per retained employee for those who are currently furloughed but are kept on until the end of January next year. It is seen as a risk that is not worth taking as economic expectations are that the businesses may have either sufficient turnover to justify bringing furloughed workers back, or be able to generate adequate cash flow.
Like-for-like retail sales data produced by the British Retail Consortium will be released tonight and this will provide the first indication of how successful the opening of lockdown for shops has been. The initial view is that while the novelty of the opening of shops saw footfall as reasonable it was well below normal.
These concerns are being reflected in the financial markets as Sterling is unable to make much headway despite the dollar remaining under pressure. Last week traders saw little reason to buy the pound and were content to remain net short
It traded between 1.2669 and 1.2462 versus the dollar last week, closing at 1.2621.
Surge in cases sees lockdown easing as a non-starter
The inability or unwillingness of the Federal Government to take action to stem the flow of new cases of Covid-19 means that the Constitutional right of every state to self-govern is putting the risk of the pandemic getting (even more) out of control at an unacceptable level.
President Trump’s glib comment that the country is seeing a higher infection rate because of its high level of testing is being proven to be nonsense. Only 10% of States saw a decrease in infections last week while several saw record numbers of cases with the national average over the same period up around 60k.
Florida is a prime example. As the nation’s playground, heavily reliant on tourism, the pressure to lift the lockdown became unbearable on Governor Ron DeSantis. He was among the first to reopen beaches and has since opened the States theme parks including the daddy of them all, Walt Disney World.
This is looking like backfiring spectacularly as Florida’s daily infection rate approached 15k. There is a real possibility that the entire healthcare system will be overwhelmed and now there are stories circulating that the second wave in the Autumn, could be significantly worse than what has been seen so far.
The Treasury’s plans for dealing with the economic effect are under review as the original Support Bill expires at the end of this month. It is impossible to imagine that Secretary Mnuchin is not working on a new plan, but it will need to be supported by the President to have any chance of being passed.
Last week the dollar index traded in a relatively narrow range as uncertainty over what is an acceptable level of risk pervaded the market. It traded between 97.17 and 96.23, closing lower on the week at 96.66.
Heads of State unlikely to find a solution this week
Recent comments about the possibility of an agreement being reached, particularly those of Dutch Prime Minister Mark Rutte, put the possibility of a solution being found at close to zero.
While this impasse is typical of the region’s continuing woes, it seems that, in a similar manner to the United States, it is the Constitution of several individual countries as well as that of the EU itself that is the most significant stumbling block.
The financial crisis that took place more than ten years ago still reverberates around the bloc with nations being very wary of giving Brussels carte-blanche to provide guarantees for member’s borrowings.
French President Emmanuel Macron who sees himself as something of a power broker in the EU and Germany’s Chancellor Angela Merkel, where the real power lies have now met twice to try to find an acceptable solution to the issue.
The fact that they have not only failed but other nations such as Denmark and Sweden have joined the Frugal Four in either opposing or being forced to reject proposals Constitutionally means that the suffering will continue for longer and the eventual recovery may take even longer to take hold.
Despite this uncertainty, the euro has held up well versus the dollar but in a similar manner to Sterling it is not able to make a great deal of progress to the upside as the threat of trade tariffs remains.
Last week, it traded between 1.1243 and 1.1370, closing at 1.1300.
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.”