13 May 2020: Sunak wants cooperation

Sunak wants cooperation

13th May: Highlights

  • Sunak extends furlough period
  • Fauci warns about opening economy too soon
  • Production data simply a confirmation of dire straits

Furlough extension to October but wants business support

Chancellor of the Exchequer Rishi Sunak provided the most telling notice yet of how serious and long-lasting the Government considers Covid-19

He announced that the Government’s payments to furloughed workers would be extended to the end of October. However, he did ask for cooperation from employers to contribute to the payments from August. This will allow a degree of flexibility which has become the Government’s watch word for phase two of the effort to control the spread of the virus.

The changes to the basis of the scheme had to move with the other efforts being put in place as the cost was beginning to look unsustainable to many economists.

At a cost of £38 billion the original scheme to pay 80% up to £2500 per month has come to the aid of 25% of the entire workforce, which according to Sunak has saved many jobs.

Later, a slew of data will provide further evidence of the near collapse of the economy. At the top of the pile but already overshadowed by the Eurozone and E.S. is Q1 GDP. The economy is expected to have contracted by 2.5% in the period between January and March, but this is a mere trifle compared to what is expected for the current quarter. It all adds up to an expectation of a 14% contraction for the year.

The growth (contraction) data is followed by production numbers for March. While the actual data has become insignificant in the grand scheme of things, the models will start spewing out predictions for their effect on the economy, when added to the effect of the virus, the decimation of the services sector and the (extremely cautious) lifting of restrictions.

Sterling tested the lows of its recent range yesterday, falling to a low of 1.2267 versus the dollar eventually closing at 1.2277. Its fall against the euro was more pronounced as it fell to 1.1305 and recovered from that level by just a few pips.

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The West is becoming wild

The continued chaotic response from the world’s most powerful economy defied any kind of logic. With over 80k deaths and around 1.25 million infections, it is impossible to predict just when there will be a degree of control being exerted.

The U.S.’ most revered expert on infectious diseases Anthony Fauci has already said a second spike in Autumn is already possible even before the first wave is under control.

The scenes pictured over the weekend coming from a few Western States show that there is still a degree of apathy over the seriousness of the pandemic which clearly adds credence to Fauci’s fears.

Fauci has also voiced concerns about President Trump’s gung-ho attitude to restarting the economy even before proper measures are in place to protect workers.

With his poll rating continuing to slip even in his stronghold of the Midwest, Trump will need start to show a President’s leadership if he is to serve a second term. With the virus still likely to be bringing significant restrictions even as the election takes place, Trump’s reliance on an economic rebound is doomed to failure.

The President’s approval rating is hovering around the low 40’s and the latest polls on the election result put Biden at 46% and Trump at 43%

The financial markets will remain in a state of flux with risk appetite likely to fall further as the U.S. pandemic continues out of control and new cases in Wuhan, where it all began, beginning to rise again.

Talk of second spikes now dominate news channels. While this points to a more uncertain future, traders are simply trying to hang on the profits they have been able to garner in Q1. There are some scary rumours about a coming liquidity crisis in the summer that could lead to flash events throughout the markets.

The dollar index fell to a low of 99.65 yesterday and closed at 99.99. The 100 level again looks a tough nut to crack once and for all in either direction.

Defence spending fuelling conspiracy theories

The volume of spending that has been seen from the EU to combat Covid-19 so far has had one unexpected if not wholly welcome side effect.

For conspiracy theorists who believe that this is a James Bondesque plot for a world takeover, the EU will struggle to find the defence budget that has been agreed for this year. It is highly unlikely that The Frugal Five will agree to funding the crisis via the back door. by agreeing to replace funds spent on battling the pandemic by topping up the defence budget.

Yesterday data was released which led to a strengthening of the view (not held by everyone), that there is a significant risk that the EU/Eurozone could implode

Accusations of abuse of power by the ECB and European Court of Justice have been made by the German High Court. While it is agreed by the German Administration that the two were left in a position where there was little choice, the German Constitutional Court is clearly angry that Germany wasn’t specifically consulted before the Bundesbank was apparently harried into agreement.

While that is a discussion for another day, as is who will put their head above the parapet when the bill is presented, the fact remains that it will have to be paid.

It could be the straw that breaks the camel’s back and there could be one or two voluntary departures, or it could be that the entire experiment is thrown onto history’s bonfire.

The data to be released this week is unlikely to drive any significant move for the single currency but a speech later this morning by the ECB’s Chief Economist and Christine Lagarde’s apparent right-hand-man Philip Lane could ruffle a few feathers at the EU Commission.

Yesterday, the euro rose to a high of 1.0885 in reaction to the dollar’s fall although it fell back to close at 1.0843.

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.”