5 October 2020: Any room for optimism?

Any room for optimism?

5th October: Highlights

  • Johnson calls on the EU to consider its biggest market
  • Trump’s illness throws a shadow over the election
  • Deflation continues as ECB considers further stimulus

Haldane continues economic bravery

Bank of England Chief Economist Andrew Haldane continued to talk up the UK economy last week although his comments were tempered slightly.

Rather than saying that the economy would recover at a faster rate than has been predicted, he said that things may not be as bad as had been first thought.

This is a subtle difference that coincides with his boss’ expectation that the economy would contract by a record 10% plus this year.

It is hard to be optimistic about the economy while it faces the added headwind of Brexit. Official negotiations came to an end last week without an agreement being reached.

The official statement that both sides agreed to summed up the entire process. The same two or three differences remain with neither side prepared to go the extra mile. Each blames the other for grandstanding driven by a belief that they believe they are in a stronger position than their opponent.

There has been little threat of no deal from UK Boris Johnson recently, neither has he mentioned his imaginary line in the sand of October 15th for a deal to be agreed.

Johnson had a conference call with EU Commission President Ursula von der Leyen on Saturday to try to move things along by agreeing wider parameters.

Johnson spoke before the call of the UK’s position as Brussels’ largest trading partner and said that the 45 years of membership should count for something.

He said, give us Canada or failing that Australia, in reference to the deals that the EU has in place with Commonwealth members, both of which appear more favourable than the deal offered to the UK. Von der Leyen agreed to extend the talks for another month with Fishing Rights, State support and post-Brexit oversight still to be agreed.

The question of fishing rights could bring a direct conflict between Paris and Brussels. French President Emmanuel Macron is keen to be seen as protecting French rights in British waters while being seen as strong domestically with an election looming.

Last week, the pound was buffeted by both Brexit and continued confused statements regarding Covid-19. It traded between 1.2746 and .2978 versus the dollar closing the week stronger overall at 1.2943.

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Uncertainty over Trump’s illness hits risk appetite

It reads like an extract from a pulp fiction novel. The President who plays down the effect of the virus catches said virus and allows himself to be a human guinea pig taking revolutionary drugs to recover and save the world.

The end of the novel is yet to be written but it is sure to be something President Trump can use to his advantage during the final stages of the election campaign.

While there has been sympathy shown for Trump’s condition, there have been some comments made through clearly gritted teeth. The Chinese President and Trump’s electoral opponent Joe Biden are clear examples.

Unless there is a deterioration in the President’s condition, he is likely to be released from hospital today to continue his rehabilitation at home. There was a degree of confusion over the weekend about just how incapacitated he was with physicians admitting to playing it down supposedly in support of his requests.

The President was able to make one demand from his hospital bed that may be significant. He called for an agreement over a Pandemic Relief Bill to be agreed before the election although this may turn out to be another case of electioneering.

The September jobs report was released on Friday. Creation of new jobs fell to 661k although the August figures were revised upwards. The data shows the need for a Relief Bill to be agreed sooner rather than later as new jobs, in line with jobless claims are plateauing.

Several Regional Fed Presidents illustrated this need with reports from their regions showing how their local economies were failing. This is in accordance with the concerns voiced by the Fed. Chairman Jerome Powell said that the lack of relief was the single most important factor holding back the recovery.

The dollar index was unable to continue its recent rally last week and fell back to a low of 93.52, closing at 93.82.

Falling prices to hit consumer spending

The Eurozone continues to be in a state of deflation. It is hard to consider how long this situation will be allowed to continue before the ECB decides that further stimulus is needed as it waits for the PEPP to take full effect.

The market does expect the ECB to increase its bond buying programme in December which will coincide with its updated economic forecasts including the outlook for inflation.

In what has become its standard operating procedure, the Central bank is unlikely to accept anecdotal evidence of a fall in consumer confidence and retail sales as confirmation of the effect of deflation on the economy, preferring to see hard data.

Core inflation reached a record low in September with most prices falling across the entire spectrum goods and services.

The lack of a single authority deciding what action is to be taken overall the Eurozone threatens to act like a ship in a gale without a Captain buffeted by the storm with no authoritative voice to steer it to safer waters.

It is hard to imagine such a situation occurring in Japan or the U.S. where there is a clear dialogue although the UK is also often seen to be too reactive.

The second wave of the Pandemic is taking hold with regional lockdowns failing to control its spread. France remains the epicentre with Spain also suffering. The second wave which started in the port city of Marseilles is gradually creeping north and there are concerns that there may be a national lockdown even before it reaches Paris if it isn’t checked.

That may lead to closed borders as Italy and Germany try to maintain their own relatively low infection rates.

The euro continued to dance with the dollar last week, reaching a high of 1.1769, closing at .1716.

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.”