20 November 2020: UK reliance on services hits growth

UK reliance on services hits growth

20th November: Highlights

  • Brexit talks delayed by positive Covid test
  • Recovery stalling as cases rise and support wanes
  • Lagarde claims ECB actions have averted a more significant crisis

GDP fall in 2020 twice as bad as next worst in G7

The UK, U.S. and Eurozone are facing mounting cases of Coronavirus as the second wave takes hold. The UK is in lockdown for another twelve days, President-elect Biden has said that the U.S. won’t enforce a total lockdown, while in the Eurozone speculation is rising that those nations that have put lockdowns in place will have to extend them as they have not had the desired effect.

However, with each country facing additional issues, Brexit for the UK, the outcome of the election for the U.S. and a mounting bad debt mountain in the eurozone, the financial markets are struggling to decide how their respective economies will fare.

It is odd that Brexit, voted for 4 ½ years ago, has been considered a solely UK issue. That is perhaps due to the fact that it was the UK’s decision to leave. It has been a singular driver for the pound although the Pandemic has taken centre stage since the Spring.

Now with the transition period having around six weeks to run, concerns are being voiced about the cost of departing the EU to a nation reeling from Coronavirus. In the long run, it could be that Brexit will cost more in economic terms than Coivid-19 although its social and medical effect will be far greater.

Faced with this double whammy, the Treasury and Bank of England face making tough decisions that could easily continue through the entire life of the current Parliament.

Unprecedented levels of Government debt threaten the entire financial system while the amount of QE being undertaken by the Central Bank and the threat of a move into negative interest rates will create a journey into the unknown.

While the Government continues to be bullish about the issues it faces, the reality is that it will take an indeterminate, but growing, time for the economy to recover to the level it was at last December let alone find the degree of growth that allows the level of infrastructure investment that is deemed necessary.

Against this backdrop the short-term rise in the value of the pound looks unsustainable. As vaccine discoveries and a probable Brexit deal provide a bullish outlook, that could fade as investors begin to see what faces the country going forward.

Yesterday, the pound stuttered a little as Brexit talks had to be halted due to a case of Coronavirus within the EU team. It fell to a low of 1.3195 but rallied to end just five pips higher on the day at 1.3274.

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Fed needs support to avert economic disaster

President-elect Joe Biden announced yesterday that he does not believe that a blanket lockdown across the entire country should take place.

While acknowledging that the rise in cases threatens to again overwhelm several States, he said that he has faith in the ability of the State Governors to deal with the second wave with support from the Federal Administration.

Of course, the level of Federal support should be seen in the shape of a package of measures agreed in Congress and the Senate, but that has been sadly lacking as the original package of measures expired in July along with other ancillary assistance since then.

Yesterday, the Senate minority leader announced that he has held talks with the Republican Senate Leader and negotiations are set to resume. There is little doubt that the Republican offer of a very targeted $500 billion package of measures will fall well short of the Democrats demand for $2.2 trillion but there appears to be a spirit of cooperation growing that won’t be subject to Presidential hectoring and heckling.

Recent data has shown a measure of concern for the economy, but employment data has been showing a continued improvement. That came to an end yesterday as weekly jobless claims rose sharply. The headline rose by 31k to 742K while continuing claims continued to fall (for now).

This will be a concern to the Federal Reserve which has been focussing on the improvement in the trend in employment and could act between meetings if it feels the underlying weakness of the economy is set to continue.

Several analysts have predicted that employment growth is likely to level off and this could force the Fed’s hand.

The resurgence of the Pandemic could derail the recovery over the next two quarters according to Dallas Fed President Robert Kaplan. In a speech yesterday, he said that there is a possibility that Q4 could see a further contraction although he doesn’t see that trend continuing.

The dollar index remains pressured by the rise in risk appetite but that could be coming to an end as Covid cases rise globally despite the optimism created by the production of vaccines.

The index fell to again test support at 92.20 which again held firm, but it was only able to rally ten points from the low, closing at 92.30

MEP’s concerns over ECB overstepping unwarranted

Christine Lagarde the President of the ECB faced her fourth and final testimony of the year to the European Parliament yesterday. MEPs told her that they were concerned that the Central Bank may be overstepping its mandate by growing the level of debt it is buying.

They went on to say that while the ECB’s efforts to combat the slowing economy, rising levels of unemployment and falling activity were commendable, it must be aware of committing the EU without proper sanction.

German Chancellor Angela Merkel hid her frustration at the actions of Hungary and Poland in vetoing the new EU budget and relief plan by simply saying that talks will continue. The two nations are sticking to their guns as, despite the delay of the relief package likely to cause real issues, they see it as an opportunity to insist that their Sovereignty not be impinged.

This will not be an issue that will go away easily with both Budapest and Warsaw likely to require a concrete commitment over the rule of law clauses in the agreement before withdrawing the veto.

This will require careful consideration in Brussels as it will reverberate for years to come if it leads to a loosening of the commitments to the independence of the judiciary and journalism in every member State.

Should the EU show the slightest chink in its reserve it could open the floodgates to an almost total rewriting of several treaties.

With the growing debt issues facing EU banks, a slowing economy and rising, close to out of control, cases of Coronavirus, the entire region faces a tough enough winter without dissension in the ranks.

The euro has continued to strengthen all week as the dollar index has weakened. That may be coming to an end as risk appetite starts to fall and the single currency may not test 1.1920 again for a while. Yesterday, it again touched 1.1880 closing at 1.1878

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.”