26 May 2020: Political uproar continues

Political uproar continues.

26th May: Highlights

  • Johnson announces lifting of restrictions on retail
  • Rising risk appetite to limit dollar rise
  • Banks facing interest rate trap

Johnson announces further lockdown lifting

On a day when the UK was supposed to be having a Public Holiday despite lockdown restrictions, the Prime Minister’s Chief Advisor faced a grilling from the press over his actions in travelling 280 miles to his parent’s farm to self-isolate.

As the Prime minister said when questioned further at the daily briefing, the evidence has now been heard and it is up to the Country to decide their attitude.

In an announcement more relevant to getting the country’s economy moving again, Johnson announced that from June 1st, open air markets and car showrooms could reopen and from June 15th, all retail premises could also reopen. This is, of course, subject to social distancing measures.

In a somewhat surreal message, Johnson reminded everyone of the need to continually wash their hands which is evidently what he has done over the Dominic Cummings affair.

This week, the CBI’s distributive trades survey will be released. Its release this morning will undoubtedly point to the continued slowdown in the economy. It is expected to rise from -55 last month to show a slight improvement to -50 in May.

House price data will be released on Friday and with the market having been reopened in the past couple of weeks some improvement on last month’s data is expected.

Sterling remains subject to global risk appetite although the balance of risks is pointing to the downside given the level of debt the Country will face once the economy gets back to normal. The only good news on that front is that it appears that the Government is beginning to look at a total lifting of the lockdown significantly earlier than had been feared a few weeks ago.

Yesterday, the pound traded in a narrow range between 1.2203 and 1.2164. It closed at 1.2194.

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Dominance beginning to fade

One of the most important outcomes of the most significant issue that the U.S. has faced over the almost four years of the Trump Presidency has been the seeming intangible challenges that have been created through his inability to provide solid leadership and unite the country to fight the Covid-19 with a single voice.

On a global level Trump has also alienated the U.S. by shooting from the hip and making the crisis about the economy. Although this appealed to his supporters at the basest level, it has set State against State at a rate virtually never seen in the country.

Before the start of the year., there were very few people who would have bet against the President winning the election come November. However, successive predictions and comments regarding the pandemic and when the country would be up and running again have fallen well short of expectations and damaged credibility.

With analysts and economists including FOMC members predicting a far longer recession than had previously been anticipated the likelihood that the President will be able to show how the economy has bounced back is almost certain to also fall short.

The U.S. economy is travelling through its third shock of the 21st Century and while the other two were financial and containable, this one is affecting every man woman and child and in a similar way that the UK saw unprecedented voting patterns in its election last December, the same could happen in the U.S. if the spread continues.

Yesterday, the dollar index remained on course to trade back above the 100 level. In thin trade, it reached 99.97, closing at 99.78. However, as risk appetite improves any significant move higher may be limited.

Banks facing impossible dilemma

Banks in the Eurozone have, by necessity, had to be highly creative over the past ten years in order to remain profitable.

However, that need may be coming to an end as bank’s capital gets decimated.

It will not been uncommon for banks across the Union to see their capital fall by more 40% this year. There is a Eur 380 billion hole where there used to be capital in their collective balance sheets.

With interest rates in negative territory banks are now facing two restrictions on their lending capability. First, the customer volume simply isn’t there, while the shrinking of their capital base is also highly restrictive. In such an environment banks would normally rely on fee income, but that Avenue is also drying up due to a lack of transaction banking deals

Banks have been facing a lack of client interest for quite some time and with the ECB trying to encourage lending by virtually throwing cheap funds at banks they have found themselves with little opportunity other than to lend it back to their Central banks at a loss.

Threatened stress testing of banks, last carried out in 2018, found a massive bad loan issue but that will be dwarfed by what is coming. It has been a truism for several years that banks in the Eurozone have been retreating back behind national borders with just a few exceptions.

The largest retreat has been beaten by Deutsche Bank. Once the preeminent non-American bank in the world. It has virtually withdrawn from trading to concentrate on its core business. This is often a euphemism for we have burned our fingers so will go back to what we are good at. That is supposed to be managing risk but that hasn’t worked out too well either.

A banking crisis to add to all the other issues is not what the EU Commission want, but it may not have any choice.

Yesterday, the euro traded between 1.0915 and 1.0875 as the market took advantage of the public holiday to take stock. It closed at 1.0897.

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.”