25 August 2020: GDP comparisons pointless

GDP comparisons pointless

25th August: Highlights

  • Lack of Brexit progress hampers Sterling
  • Investors blinded by big-tech forecasts
  • Economic stumble, a blip, or a structural failure?

The UK hit harder but recovering quicker?

Brexit remains a significant driver for Sterling despite the fact that the Covid-19 Pandemic will be a major influence for some time to come.

If there is a second spike in infections through the winter and agreement cannot be reached over trade following the UK departure from the EU on 31st December, the UK will face a unique challenge to its ability to grow its way out of recession.

Michel Barnier, the EU’s Chief Negotiator says he is disappointed with the progress made so far in negotiations but with both sides still jockeying for position, the time for brinkmanship is surely coming to an end.

While a no deal departure will be a major issue for the UK its effect on the EU’s supply chains will also be serious. Barnier has reportedly recommended that Brussels be cold-blooded with the UK. Competition rules and fishing rights are the apparent sticking points.

As the clock counts down into the final three weeks of talks, former UK Negotiator David Davis has labelled this period as being more important than the first three years.

The Bank of England Governor’s speech at the end of the week is likely to continue to carry the threat of a cut in rates to below zero. An actual cut is considered to be an unlikely shift in policy for the Central bank unless the recovery really starts to falter as the Government tentatively withdraws the unprecedented level of support that has been in place since lockdown.

The pound was buffeted by the Brexit issue as well as a slowly strengthening dollar yesterday. It fell back to a low of 1.3053, closing at 1.3063.

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Apple’s $2tn valuation means nothing man on benefits

The growing fracture between stock markets and the real economy was highlighted in an article published yesterday by Nobel prize winning economist Paul Krugman. He asserts that optimism engendered by projections for big tech profits create a false reality which is far removed from the reality of growing unemployment, Federal support for business, the issue of a second spike and the uncertainty over the election.

His comments were triggered by Apple becoming the first business to have a market capitalization in excess of $2trillion.

With the top six tech firms making up 29% of the S&P 500, and Apple weighing in at 6.5% alone, the danger of a deep reliance on future profitability is that it is far removed from what is happening in the real economy.

The Chinese reaction to the latest instalment of the blame game from President Trump has been to largely ignore his comments. Speculation is growing that Chinese President Xi Jinping has placed the relationship on hold pending the result of the election. It is widely believed that a Biden victory in November would lead to a reset of the entire relationship with Biden taking a less aggressive stance.

Jerome Powell the Fed Chairman will address the Jackson Hole Symposium later in the week and his speech while being of little immediate consequence to traders will hold a major significance for how the Central Bank operates going forward.

Powell is going to outline how and why the Fed sees inflation as being too low for too long. The move to an average inflation rate will mean that the FOMC is going to allow inflation to run at above target for some time. The question will be how the Fed proposes to push inflation up above the 2% target. For the man in the street, the question will be why?

In typical market reaction a change that will be a long-term goal provided short-term activity yesterday as the prospect of higher inflation leading to higher rates gave the dollar index a boost. It rose to a high of 93.34, closing at 93.30.

Employment is likely to have a more significant short-term effect on the dollar, with two sets of jobless claims before the NFP report on September 4th. The trend in weekly claims has been mixed with continuing claims and initial claims moving in opposite directions. This has led to the current difficulty in discerning a trend for the dollar as it trades between 92.50 and 93.80. Yesterday, it reached a high of 93.34, closing at 93.30.

Is the Fed driven by confidence while the ECB struggles?

While it has long been pondered whether the Eurozone will survive and traders ask themselves what the catalyst could be that finally brings the entire edifice crashing down, the question of market confidence in the Central Bank has come to the forefront.

The Fed by comparison has, in the last fifty years, had Chairmen that have inspired confidence. Even Janet Yellen who was considered something of an outlier, not just due to her gender, exerted an understated influence.

The ECB has been viewed in almost the opposite manner by traders. Mario Draghi has been viewed as the outlier.

He inspired market confidence. When he spoke, he was listened to in a way in which his predecessors seldom were. With the appointment of the role of President a more political decision than it even is in the U.S., it has been the case that the President has seldom been the right man for the role.

With a well-respected and determined selection waiting in the wings to follow Draghi, in BUBA President Jens Weidmann, the political choice of Christine Lagarde was made to allow the German Ursula von der Leyen to become EU Commission President.

While it is difficult to label the market as prejudiced against the single currency, there is a definite feeling that any euro strength is a prelude to a fall.

This may have its roots in the inability of the central bank to control monetary policy as well as other G7 Central Banks can. The switch some years ago in the UK to monetary policy decision making becoming independent from Government gave the Bank of England the autonomy to do what is right, rather than what is politically expedient.

With data this week expected to show that the recovery of activity was mainly due to pent up demand the market may be shown the reality of the long and difficult road ahead he region’s economy.

Yesterday, the euro fell to a low of 1.1784, closing at 1.1787. It remains difficult for the single currency to cling on above 1.18. The longer it takes to establish a foothold at a higher level, the more likely it is to see a correction.

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.”