2 December 2020: Cull of the weak on the High Street

Cull of the weak on the High Street

2nd December: Highlights

  • 25k Retail jobs set to disappear
  • Bipartisan support package being promoted in Congress
  • Inflation remains in negative territory

Sterling banking on Brexit deal

The financial markets have clearly decided that the conclusion of a trade agreement with the EU is currently by far the most important driver for the economy.

Over the past few weeks as the Brexit clock continues to count down the Chancellor and Bank of England Governor have speculated about the effect of leaving the EU with no deal and it has been generally agreed that no deal will have a more lasting effect on the economy overall than the Covid-19 Pandemic.

That is why, on a day when the effect on those retailers who have become dinosaurs, locked into long bricks and mortar leases on expensive High Street premises, finally accounted for two of the most prominent groups, Debenhams and Arcadia, Sterling still managed to break above long-term resistance levels.

Rumours are again circulating of a deal being reached and news of which of the two sides has blinked first is eagerly awaited.

With the UK already expected to have the slowest return to growth in the G7, the effect of a no deal Brexit will bring significant additional strain. The effect will be felt most by the industrial and manufacturing sectors which, although dwarfed by the services sector, have a far greater volume of dealings with the EU.

While the numbers for the effect on the economy of the Pandemic are truly shocking, it is expected that GDP will be back at pre-Covid levels by the end of 2022. However, the effect of no deal will mean a further 2% drop in growth which will continue for years to come.

The UK will come out of its second lockdown today and that will be replaced by a regional tier system that was passed through Parliament last evening.

With the Opposition Labour Party abstaining en-masse, there were still 78 MPs who voted against the measures that were seen as too tough in several areas with low infection rates but suffer from their proximity to areas where cases are still very high.

Sterling reacted to a combination of Brexit hopes and a further fall for the dollar index yesterday. It rose to a high of 1.3442, closing at 1.3426.

Traders have clearly decided that they cannot stand in front of a moving train and those investors who wish to take up short positions have decided to stand on the sidelines until the rally fades.

The combination of a Brexit deal and the deployment of a working vaccine have become a heady mix for Sterling bulls.

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Republicans emerge from Trump’s shadow

The departure of Donald Trump from the White House appears to have allowed Republican members of Congress to emerge from his giant shadow and work on a package of measures to allow Federal Support for those most badly affected by the Pandemic.

Treasury Secretary Steve Mnuchin commented yesterday that measures being considered following news that a Bipartisan package was being worked on which will take away the uncertainty that it would take until Joe Biden was fully installed as President for relief to be agreed.

As something of a parting shot, Donald Trump vowed to return in four years to again stand as Republican Presidential Candidate. With a week being a long time in politics, four years seems like several lifetimes.

Janet Yellen who is set to replace Mnuchin as Treasury Secretary in Biden’s Cabinet spoke yesterday of the lack of support being given at a Federal level as being an American tragedy.

Biden introduced his tested and experienced financial team yesterday and Yellen went on to say that while times could get tougher before the pressures ease, help is on the way and the Administration will continue to listen to the needs of those who require help the most no matter their political affiliation.

In the early weeks of the Pandemic, the U.S. economy shed around 20 million jobs and only half of those have so far been recouped. After dealing with the most pressing cases of suffering, the new Administration will need to deal with job creation as weekly jobless claims appear to have bottomed out while new jobs, as will most likely be evidenced by this week’s NFP data, level out.

The dollar index reacted to the news of a package of support measures yesterday by falling through several layers of support.

It reached a low of 91.15 and closed at 91.18.

Factory activity continues to fall in November

Inflation in the Eurozone remained in negative territory when it was released yesterday. According to several members of the ECB’s Governing Council this will not stop the Central Bank from adding further support at its next meeting.

Italy yesterday agreed a further eight billion euros of support for ailing businesses yesterday which will provide the ECB with further bond issuance to gobble up.

The onus placed on banks to lend to their customers who are becoming less and less able to repay their debts has shifted slightly with debt being taken on at a more Governmental level.

The second wave of the Pandemic continues to rage through the Eurozone, and this has had a severely detrimental effect of the plans of individual nations to begin to implement major infrastructure plans to provide both jobs and investment.

There will be a tipping point reached where the funding of business to simply survive the current downturn will mean that investment will no longer be possible.

Data released yesterday showed that manufacturing output across the entire region fell in the last quarter with Spain the most badly hit. Growth contracted by 12.8% so far this year, the highest level in the developed world.

With tourism expected to remain badly hit until well into the summer season, even without a third phase of infections that cannot be ruled out, the distribution of a vaccine is now becoming critical to several nations economic survival.

With a decision on how to open ski resorts taking place in Brussels, a major operator in Austria which is resisting any ban commented yesterday that the season is already over and it will be extremely difficult to stay in business long enough to see another one.

The euro reacted to the dollar weakness yesterday crashing through the psychologically important 1.20 level versus the dollar, but resistance was seen around the 1.2080 level and it has so far run into selling pressure. It reached 1.2075 yesterday, closing at 1.2073.

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.”