Sector may not recover for years

The services sector in the UK spans many segments of ordinary life. It has been the most widely hit by the furlough of staff and will see the largest share of job losses, as befits its status as the largest part of the UK economy.

An example of this is the travel industry where nine of every ten businesses are facing significant job losses. This is created by the knock-on effect across the entire sector that has seen airlines making staff redundant, hotels and restaurants struggling to make the new social distancing measures viable and quarantine measures (now relaxed) forcing holidaymakers to stay home.

Retail has also been badly hit with several big-name high street stores failing to reopen or cutting their number of outlets. Rationalization has become the watchword in this part of the sector as online shopping has eaten into their turnover.

Manufacturing, which is something of a niche in the UK following the growth of China as the world’s factory, is able to survive but even that sector us struggling, with specialist manufacturers like Aston Martin and Bentley shedding jobs.

Chancellor Rishi Sunak has admitted that he cannot save every job and as the Government, that has been in office a matter of months, grapples with Brexit and possible second wave of Covid-19, it will be continued high unemployment, possibly reaching three million, that will require long term job creation schemes to become a priority. They will need to be far more sustainable and fit for purpose than headline grabbing gimmicks announced so far.

As was mentioned yesterday, the pound struggled last week to make fresh gains versus the dollar and yesterday various factors that support the dollar contrived to force weak longs to abandon any hopes of a surge towards 1.30.

It began a correction back towards 1.25, making a low of 1.2538, closing at 1.2552.

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Administration looking for a scapegoat

The tensions between President Trump and Anthony Fauci, the director of the National Institute of Allergy and Infectious diseases and a member of the White House Task Force on Covid-19, bubbled to the surface over the weekend.

Trump criticized Fauci’s change of mind over face coverings and his descriptions of the severity of the seriousness of the Pandemic. Fauci, who has held his job since 1984, is considered the U.S.’ if not world’s most renowned immunologist.

The administration’s criticism of Fauci comes as several new highs were seen in both infections and fatalities. Florida saw new infections rise to break 15k and there have now been more than 135k deaths across the whole country.

Trump and Fauci have clashed several times, mostly as he has been seen as contradicting the President’s comments over the seriousness of the Pandemic.

Some of the most seriously affected States, Florida in particular, will be key battlegrounds in the upcoming election, so Trump will be keen to support them and play down the implications of the rising number of cases.

Q2 earnings will start to be released this week. This is an important event for both the economy and markets. The market will be able to deal in fact rather than rumour as turnover and profitability are put under the microscope.

Banks are likely to do well given the fee income that have been able to generate, which could see a backlash from citizens and small business owners who have been precluded from some of the relief measures. Banks are predicted to try to rationalize by closing branches under cover from Covid-19.

Tensions between the U.S and China are on the rise again., The trade talks are set to get going again and the U.S. has called upon the WHO (despite no longer being a member) to investigate the origins of Covid-19.

Yesterday the dollar reacted to the rise in tension which hit risk appetite. It rose to a high of 96.68 but closed 5 pips lower on the day at 96.55.

Recession to be deep and long

The recession in the Eurozone is likely to be technically short as QoQ growth returns to the region in the current quarter but that will only be due to the significance of the downturn in Q2. It is possible that the economy will grow in Q3 compared to Q2, but the year will still see a major downturn. As the Eurozone starts to recover from the Pandemic it will need strong leadership from the ECB and EU Commission who will both need to put in place robust measures to combat unemployment.

The responsibility for job creation will rest with individual Governments and that could make the recovery patchy. Any bloc-wide employment schemes may create migration which while allowable under free movement could cause national unrest given the need for employment spanning every nation.

If there is a second wave of Covid-19 in the Autumn, there could be a double-dip recession and that would slow recovery that would add months if not years to the economy’s recovery to pre-January 2020 levels.

Given the twenty plus years that the euro has been in operation, questions are being raised about its unequal benefit to Eurozone members. More affluent countries like Belgium and Holland have seen benefits since the euro is weaker than either the Belgian Franc of Dutch Guilder would have been, given the relative growth rates (pre-pandemic) of those countries, while the likes of Greece Spain and Italy have not been able to devalue given their economies far weaker performance.

Once the pandemic is past the ECB will need to look into this phenomenon as it could create a far more significant north-south divide.

The euro mostly trod water yesterday as its main influence was across the Atlantic. It rose to a high of 1.1374 but was unable to kick on and fell back to close at 1.1344.