5 March 2021: Markets worry over tax grab

Markets worry over tax grab

5th March: Highlights

  • Sterling unlikely to rally above 1,4080
  • Powell not yet satisfied with progress of recovery
  • Retail sales plummet

Support only sufficient if recovery takes off

Over the past year the Pandemic has been unpredictable, and any plans made by the Government to tackle the crisis and provide support to those most affected have been subject to change almost as soon as they have been announced.

In his Budget presented to Parliament this week, Rishi Sunak has shown a degree of caution, in that the measures he announced have provided support rather than stimulus.

While continued support is vital to ensure that life goes on, employment is going to continue to be an issue and too little has been done to stimulate the jobs market going forward.

The Pandemic is likely to scar the economy for a generation and there are genuine fears that scenes reminiscent of the days of high unemployment that accompanied the major changes initiated by Margaret Thatcher may return.

The Budget showed a high level of short-termism such that a charge could be levelled at Sunak that he doesn’t share the Prime Minister’s confidence that life will return to normal by early summer.

While Brexit has barely been noticed as the country lurched through the pandemic, there are still parts of the UK’s departure from the EU that need to be addressed.

One is very visible while the other major issue is less so to the man in the street.

London is still awaiting Brussels agreement of the trade deal as it affects movement of goods between the North and South of Ireland. Boris Johnson has moved this week to ease bottlenecks that have continually occurred.

The other, which appears on the surface to be of little consequence but could see a significant decline in the contribution the City of London makes to the country’s GDP. That is in the area of financial services and in particular the clearing of derivative trades denominated in euros.

London has been the pre-eminent centre for financial services as the markets have matured and that is a position jealously coveted in Brussels, Paris, and Frankfurt.

Brexit has given the EU the opportunity to try to wrestle what they see as their share of business away from London.

The Bank of England is determined that the status quo should be maintained since there is going to be a global change in this business as regulations governed by institutions like the Bank for International Settlements are being considered.

The pound reacted to the rally in the dollar index created by comments by Fed Chairman Jerome Powell yesterday (see below). It fell to a low of 1,3880, closing at 1.3889. Major support is seen at 1.3860 which if broken could negate the pound’s recent rally.

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NFP to drive short term direction

Today will see the release of the employment report for February in the U.S. and while there is continuing optimism at this time every month, there remains a fear that until the country is confident of emerging from the Pandemic that employers will remain cautious.

It is highly simplistic to believe that a difference of, say, 50k in the number of new jobs created in the month could have a lasting effect on the economy but it is now more about sentiment than hard data.

President Biden’s stimulus package has not received a smooth ride through the Senate as there has been some horse trading that has seen the $1,400 support payment tapered as to who will receive it.

For what it’s worth, the average expectation for the headline NFP number is +125k with the risk skewed to the upside (more wishful thinking?)

Fed Chairman Jerome Powell ignited the markets yesterday in a speech in which he commented that he is not concerned by rising yields on Government debt.

He went on to say in a wide-ranging speech that the current level of monetary policy is about right, while he is not concerned about rising inflation which, he believes, will be transitory.

The recession that was caused by the pandemic has been vastly different to a systemic economic downturn and therefore the economy can recover as quickly as it fell.

Powell also made an oblique comment on the willingness of the FOMC to act again should circumstances demand. He said that the Fed is still a long way from reaching its inflation and employment goals.

The comments saw Government bond yields rally while the dollar index challenged resistance at 91.60. It reached a high of 91.67, closing at 91.60 and has continued to look strong overnight.

Price increases will last as long as pent-up demand

The eurozone economy is in danger of falling further behind other G7 nations as the economy is unlikely to return to pre-Pandemic levels until early 2023. That fact points to a double dip recession and the GDP for Q1 will contain the answers to several unanswered questions.

German Chancellor Angela Merkel has followed Boris Johnson in announcing her roadmap out of recession. It has been necessary for her to be more cautious given the pace at which the vaccine rollout continues to move.

There remains considerable angst amongst EU members regarding vaccination rollouts. Italy yesterday blocked a shipment of 250k doses of the AstraZeneca vaccine produced at a factory there bound for Australia.

This is the first instance of a country using the new regulations at the heart of the recent fiasco to block a shipment that is considered in contravention of the company’s obligations to the Union.

AstraZeneca is on course to deliver only 40% of the agreed number of doses to the EU citing production difficulties.

This will have an overarching effect on the overall recovery with threats to the opening up of summer resorts in countries that desperately need to begin to recover from what has in effect been three winters.

An even more visible example of the growing desperation across the region was seen in retail sales data that was released yesterday. Month on month, the numbers fell by 5.9% versus an expectation of a fall of 1.1% Year on year the fall was 6.4%.

The ECB will remain under pressure to provide additional stimulus, but its cupboard of products is fairly bare.

In reaction to Jerome Powell’s comments, the euro fell to a low of 1.1961 yesterday, closing at 1,1970.

A lot depends on today’s employment data in the U.S.to discover the single currency’s short-term direction.

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.”