Construction data adds to recession expectation

Prime Minister Boris Johnson spent his second night in hospital in intensive care. Labelled a precautionary move, markets sold sterling last evening as traders showed concern that the UK could appear rudderless.

Johnson’s hospitalization sends out a stark message to the population that the Covid-19 virus does not discriminate and everyone is potentially at risk.

As the apex of the infection curve approaches, the Government is being pressed to release an exit strategy for how the lockdown will be lessened. Since the apex will be reached by different regions at different times, allowing businesses to reopen will require careful consideration.

Data released yesterday showed that the construction sector is being as badly hit as industry and manufacturing. Output fell from 52.6 in February to 39.3 in March, a further signal that the economy is at a virtual standstill.

The pound remains in fragile state with traders finding themselves unable to buy into any rally as they continue to look for decent levels at which to add to existing short positions.,

Andrew Bailey the new Governor of the Bank of England has rejected the use of monetary financing to support the economy. The inflation of the balance sheet in order to fund Government spending colloquially labelled as printing money is outside the Bank’s policies and there is a risk of fuelling runaway inflation by using such action. The current bond purchasing programme is well controlled with an end date and a limit on the size of the operation.

Yesterday, the pound was mixed, influenced mainly by varying reports of the state of the Prime Minister’s health. It traded between 1.2326 and 1.2210, closing at 1.2231, a fall of 39 points on the day.

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California worst hit with 31% fall in GDP

The toll on the U.S. economy from the Covid-19 pandemic is starting to show in a more obvious manner than simply the release of economic data. With deaths now exceeding 10,000, the economy is at a virtual standstill.

Although New York State is the epicentre of the pandemic the economic effect is being as keenly felt elsewhere. California is currently the worst hit state with estimates putting the slowdown in activity at almost 40%b of the State’s GDP.

President Trump is becoming more and more strident in his concern over U.S business and the economy. This sounds more like a personal concern as he leaves the fight against Covid-19 to his medical team.

Measures taken so far by the Fed. and Treasury are to deal with the current fallout from the pandemic. What will need to be done to ensure that the coming recession is as short as possible and doesn’t develop into a depression which could last for a significant period, are yet to be considered.

Given that the peak of infections is not even in sight yet, Trump’s prediction from a few weeks ago that the country would be reopening by Easter looks exactly as it did when first uttered; woefully out of touch and optimistic.

With the markets still reeling from Friday’s employment report, traders have sharpened their concentration on further releases with this week’s initial jobless claims taking on greater importance than they have before. It is expected that there will be a further 5 million claims for unemployment benefit this week with the total likely to hit between 20 and 25 million this month.

The dollar index continues to attract buyers as it remains above the 100 level. Yesterday, it reached a high of 100.93, closing at 100.80 marginally higher on the day.

Open borders becoming less acceptable

There have been plenty of headline grabbing comments and reactions to the current crisis that point to ongoing issues with the fabric of the EU during the current crisis However, it is the issue of one of the basic covenants of the region that could be the issue that destroys unity.

The Schengen area named after the town in Luxembourg where the treaty was signed enshrines the notion of unencumbered travel for citizens and goods between the 27 nations of the region.

The closing of borders ostensibly to slow the spread of Covid-19 and being considered as a major stumbling block in the cooperation between nations affected to a differing degree is being considered as a permanent change since its effectiveness and rationale are being questioned.

Were that to happen, far from the future leading to greater unity, the conditions will be loosened to a significant extent which may cement in practice the two-tier EU that has existed since the financial crisis and has been exacerbated by recent events.

The Euro itself has threatened falling to parity with the dollar several times in the post-financial crisis era but has often been saved by issues in the U.S. economy. Now, with the pace of recovery between the two nations likely to differ significantly, this could happen in the coming months. It is most likely to happen early in the recovery period since traders will be keen to sell the rumour as speculation mounts over where the recovery will be most effective.

There are several strong points of support long before parity becomes a certainty. The three most significant are at 1.0640, 1.0340 and 1. 0220.The all-time low is at 0.8385 reached in October 2000.

For now, the euro fell to a low of 1.0768 yesterday, closing at 1.0792.