Market gets ahead of itself
Morning mid-market rates – The majors
16th April: Highlights
- Lack of Exit Strategy hits sterling
- Weak data sees risk aversion return
- Brussels calls for Coordinated exit from lockdown
Traders reminded that the UK is likely to be hardest hit
With little economic data being released this week to remind them how deep the coming recession will be, market practitioners got ahead of themselves when considering the slowdown when compared, in particular, to the U.S. and Eurozone.
There have been calls in the press and from the Opposition Parties for an exit strategy to be published. With Government Ministers under immense pressure to provide guidance on a situation that is seemingly out of control, any discussion of how any exit will be handled are unlikely to even enter their heads yet.
Having seen various data releases provide a jolt to both the U.S. and Eurozone, the speculation over the future of the UK economy will be brought into sharp focus next week. Employment data will be released on Tuesday, with retail sales on Thursday. Neither of these reports are likely to make pleasant reading and should end any thought of any positive outcome for the country.
There has been widespread condemnation of the fact that only 2% of the Government’s emergency loan scheme has been distributed so far. Criticism is mostly directed towards banks which are treating the loans as commercial transactions despite the fact that the vast majority of those seeking finance are only doing so to survive the lockdown and would not otherwise be seeking new facilities.
Yesterday, the pound fell to a low of 1.2436 versus the dollar and closed at 1.2518,
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Cancellation of WHO funding brings Trump more criticism
Retail sales fell from -.04% in February as consumers started to consider the effect of Covid-19 to -8.7% in March as the lockdown took full effect.
Industrial production fell from +0.5% in February to a 5.4% fall in March. This is likely to fall even further over the rest of Q2 as the political need for the lockdown to be lifted is balanced by the human cost.
Yesterday, President Trump declared that the peak has passed, and the U.S. would reopen soon. This was as the number of infections reached close to 640k and fatalities surpassed 30k.
When asked why fatalities in the U.S. made up close to a quarter of global total, Trump responded by saying that the rest of the world were lying about their mortality rate. Trump went on to ask does anyone really believe the number of deaths in China?
May 1st has been pencilled in as the date the lockdown will start to be lifted with some States returning to normalcy before that. When asked if that were feasible, Trump responded there is also death involved in keeping the country closed.
As and When the lockdown is lifted and the election campaign resumes, it will be interesting to see the effect on Trump’s popularity although the tightly controlled nature of his rallies may hide that from plain view.
As the data released yesterday provided a reminder of how serious the slowdown is likely to get before the lockdown is lifted, traders were reminded that any increase in risk appetite is premature. This led to a rally for the dollar index which hit a high of 99.98, closing at 99.56
What is needed to drive economy forward?
One of the proposals that have been leaked is that countries coordinate their lifting of the lockdown with Brussels in order to allow the strong to help the weak. To put this in context, Brussels which offered no tangible support to either Italy or Spain as the crisis grew and the number of fatalities were rising at an alarming rate now wants to have a say in how and when the sanctions are lifted.
With the pooling of debt still anathema to several nations, the weaker, Southern states are beginning to feel that they are not to be trusted and they will squander any cheaper funds they receive.
The lack of unity displayed by the EU is one of the major causes of the IMF’s bearish view of the economy and its ability to recover even over the medium term.
Data for region wide industrial production will be released later this morning with analysts unsure just how bad it will be since access to figures which make up the overall number is hard to establish.
Following last month’s year on year fall of 1.9% it is certain that the number will be far worse as output grinds to a complete halt.
With little new money on the table, von der Leyen’s words that the strong will support the weak have something of a hollow ring to them. Unless there is a complete change in how the Union and its individual states are funded the recession that has already started in several countries will be deeper and more severe than even the most bearish economists predict.
Yesterday, the single currency suffered at the hands of a resurgent dollar. It fell to a low of 1.0856, closing at 1.0910 as the elusive 1.10 level looks as far away as ever.
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.”