31 July 2020: Growth not austerity key

Growth not austerity key

31st July: Highlights

  • Rising unemployment and falling house prices giving Sunak nightmares
  • Economy crushed by weight of Covid-19
  • German recession a red flag for entire union

Banks in trouble as loan defaults grow

The UK economy has been driven by austerity for as long as the Conservative Party has been in power. The excuse has been that the debt left behind by the Labour Party had to be dealt with as a priority.

The Government’s manifesto for the December election and the Budget which took place before the lockdown both pledged an end to austerity. However, it has taken the most unexpected of events to ensure that austerity is finally dead and buried.

Covid-19 has taken the austerity card out of Chancellor Rishi Sunaks hand as the only way to solve the recession that is now certain to happen is for the economy to grow and that is by stimulus not penny pinching from public services.

The Conservative Party’s fear of borrowing getting out of control will have to be shelved for possibly the entire length of the current parliament. Stimulus needs to be pumped into the economy and cash placed in people’s pockets to spend. This will ensure that retail sales, the economy’s lifeblood remains solid.

One sure sign of a severe economic downturn is the performance of banks.

Lloyds, one of the big four has announced that it is to add £2.4 billion to its provisions for bad debts. This spooked markets as their total provisions skyrocketed to £3.8 billion in the first half alone. Lloyds is certain not to be alone as other banks follow suit. HSBC has the additional issue of its Chinese/Hong Kong roots and its cooperation with U.S. investigations that are sure to upset Beijing.

There is no doubt that the Chancellor is going to have to intervene again as furloughed staff remain at home should there be a second wave of Covid-19 as the Autumn approaches.

With businesses having to fund more of their employees’ wages despite the promise of the £1k bonus for any member of staff retained until January, unemployment is sure to rise again and will become the single most important issue facing the country.

Yesterday, the pound continued its recent rally versus the dollar. It climbed to a high of 1.3102, closing at 1.3095. There is a truism in the markets, not to stand in the way of an express train, and the way the pound is currently performing it would be very difficult to bet against further rises.

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Economic contraction beyond worst expectations

Yesterday’s announcement of preliminary GDP for the U.S. showed that the economy contracted by 32.9% between April and June.

This is beyond the expectation of most analysts and showed that Jerome Powell, who obviously had advance knowledge of the figures, was entirely correct in his estimation that the recession would be long and deep and will require the Fed to use every tool at its disposal to help the recovery.

Congress is still discussing what it is going to provide by way support to those workers who have lost their jobs or been furloughed during lockdown.

The current bill expires today, and Congress is still haggling over how it will be replaced. It is certain that the relief offered will be nowhere as generous as what has been seen so far. This will mean that underfunded States will be left to pick up the pieces.

The data as well as the anecdotal evidence shows that the U.S. economy is struggling. With the President now talking of a postponement of November’s election ostensibly due to his concern over fraud should there be a huge increase in postal voting, the future looks decidedly bleak from every possible angle.

When viewed through the lens of increasing individual poverty, it is fairly obvious why the dollar is struggling to find a foothold.

Yesterday, the dollar index fell to a low of 93.03, closing at 93.05. It is hard to say what can happen to provide some support for the greenback without a sea-change in policy and a greater understanding of what is needed to get America back to work again.

Economy contracts by 11.7% in Q2

Germany is considered by most financial analysts as a proxy for what is happening, good or bad, in the Eurozone economy.

Following yesterday’s release of data for Q2 GDP, it is clear that the evidence is currently bad. Having fallen by 2.3% in Q1, the German economy shrunk by 11.7% between April and June.

In a similar manner to the U.S. it was obvious to every observer that GDP data would be abysmal in Q2 but the numbers are as bad as could have been expected but must still be respected and not brushed away by simply being described as well, what did you expect.

The concerns over a second spike which, in the words of the UK Health Minister, is rolling across Europe, will make data for Q3 of greater concern to traders than it otherwise would have been.

Very slight improvements to Eurozone-wide services sentiment and industrial confidence were countered by a fall in consumer confidence as concerns over how the relief fund will be distributed hit hard.

Now is the time for leadership but with concerns over the rising infection rates being seen in several individual nations, some may resort to the what we have we hold attitude that pervaded the original outbreak.

The euro continues to defy gravity particularly given concerns over a second lockdown. It rose to a high of 1.1848, closing with a pip of the high.

In a similar manner to the pound it is hard to predict a correction just yet but given how long it was since the single currency was at its current level, it continues to be a possibility.

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.”