28 January 2021: Covid push could end High Street

Covid push could end High Street

28th January: Highlights

  • Pressure on Sunak growing as Johnson cautious over lifting of lockdown
  • Powell and Yellen united in inflation dovishness
  • Lagarde possibly underestimates the risk to the ECB

Car sales collapse but pent-up demand drives expectation

The Prime Minister, under pressure to give the country guidance on when the lockdown may be relaxed, gave a tentative date of March 8th as the earliest date on which schools can reopen. At yesterday’s Coronavirus press briefing, Boris Johnson was at pains to point out that this is the earliest date on which restrictions can be reduced and this is by no means certain.

He went on to say that the target date of 15th February for vaccination of the four most vulnerable groups is well on track and if that is achieved then he will provide a more detailed roadmap and timetable for lifting restrictions on February 22nd.

That, he explained, will allow schools the two weeks’ notice that the Education Secretary announced recently, would be provided to allow them the time to be fully prepared.

The inauguration of Joe Biden as U.S. President last week has provided the UK with hope that there will soon be a free trade deal agreed between the two nations. It is hoped that Biden will be pragmatic about the special relationship and encourage the Secretary of Trade to push on with talks.

That having been said, the next significant deal to be agreed post-Brexit is expected to be with Australia. An agreement will be a significant boost to the telecommunications sector in particular. This is an area that it sees as a major opportunity especially in view of the current strained relationship between Canberra and Beijing.

The UK trade secretary announced that a deal with Australia will be the next cab off the rank, closely followed by New Zealand and the U.S., although as far as Washington is concerned that may be more wishful thinking in the short term.

A deal for the sale of the Debenhams name was agreed recently but the blow to the High Street of the closure of all its bricks and mortar outlets could be the first stage in a significant shake up in the retail sector.

The younger generation has become very comfortable with shopping online, appreciating its convenience and time saving properties. The British Retail Consortium is working on a report on how the retail sector is likely to change over the next five years and this will be eagerly awaited.

Another sector of the consumer sector, car sales, reported yesterday on its data for 2020 yesterday. It saw the lowest volume of sales both domestically and for export since 1984. Both areas of sales were down by around 30% although the report did hold out hope that pent up demand will see an improvement this year as restrictions are lifted. This is one area where a showroom wins over online purchases, and this is unlikely to change any time soon.

The pound again failed in its recent attempts to break significantly above the resistance at 1,3720 against the dollar. It made a high of 1.3758 but fell back to close at 1.3681.

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Fed committed to using full range of tools to ensure growth

It seems that credibility is fast becoming one of the major factors driving the effectiveness of Central Banks. This has perhaps always been the case since in the G7 and developed nations, there has never been a Central bank as poorly regarded as the ECB.

Yesterday, the FOMC met for the first time this year and while its Chairman was unable to provide a particularly bullish statement following the decision to leave both interest rates and asset purchases unchanged, his words were listened to intently by the markets.

Even more importantly, it is widely accepted that when Jerome Powell says that the Central bank stands ready to act immediately it detects any further weakness in the economy, no one doubts his words. This is because investors and traders know that the Fed has both the tools and intention to support the economy.

It was generally accepted that the most important part of the meeting would be the press conference and so it proved. While there has been no hint of turmoil being generated by the second wave of Covid-19 that is sweeping through the U.S., Powell’s words were well received.

He doubled down on the Bank’s intentions to continue asset purchases and described talk of tapering the programme as premature. This comment had little effect on the market which showed that traders hadn’t really expected any change just yet.

Powell agrees with the newly installed Treasury Secretary Janet Yellen over inflation. They are both dovish over the prospect of significant price rises brought about by a weakening currency and the residual effect of the expansion of the Central bank’s balance sheet.

Any spike in inflation is likely to be transient and Powell has already said that the FOMC has agreed it would be allowed to rise above 2% for some time. When asked about a possible bubble in asset trading generally, Powell responded that he believes that the virus and fiscal policy are having more effect than monetary policy.

The dollar index was barely troubled by the comments. It rose to a high of 90.88, well within its recent range, and closed at 90.59.

German consumer confidence plummets

Data for consumer confidence in Germany, a bellwether for the rest of the Eurozone, plummeted in the latest reading. It fell from a rate of -7.5 which was adjusted lower from -7.3 to -15.6.

This together with the recent comments regarding the virus being close to out of control by Chancellor Merkel has cast a pall over the prospect of a quick recovery in both activity and growth.

There is no longer any talk of a V or even a U-shaped recovery with any hopes of escape from recession shelved.

One of the major issues facing confidence across the entire eurozone, is the delay in both obtaining and delivering the vaccine.

A Senior Official at Pfizer was quoted yesterday as saying that the reason the programme is so far the UK is that orders were placed by Brussels three months after London. That is a direct result of the indecision that prevails over who does what and when in the region.

The ECB’s Chief Economist, former Bank of Ireland Governor, Philip Lane, commented yesterday that the delay in providing support to countries struggling economically has led to it becoming necessary for the support to be more targeted.

Lane, who is currently under pressure over the amount and content of advance warning of ECB intentions he gives to the CEOs of large financial institutions in the region, has called for a review of the size and distribution of the PEPP. He is facing a push back from his colleagues who question the reasoning for a further package when the effect of the first is not yet being seen.

The resignation of Italian Prime Minister while serious for Italy’s recovery in the short-term is little more than a tactical move to try to push through a new coalition.

The Italian President stopped short of not accepting Giuseppe Conte’s resignation but asked the Prime Minister to continue in-situ while he considers the ramifications and his options.

The euro fell yesterday against the dollar. It reached a low of 1.2058, closing at 1.2104. A test of the 1.20 level will need to be attempted before the market agrees that any correction is becoming a trend.

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.”