UK banks failing customers
8th April: Highlights
- Sterling tied to Johnson recovery
- Risk appetite returns as market comes to terms with virus outcomes
- Split over Coronabonds widening
Government trying to soften terms of loans
Andrew Bailey, the Bank of England Governor, announced a lowering of the capital; requirement for banks recently meaning that they are in a position to lend more to their customers but several corporate customers have expressed their disappointment that their potential demise is being exacerbated by their bank’s intransigence.
As the pandemic reaches its zenith, an exit strategy is going to be announced by the Government that has to ensure the survival of businesses that are going to struggle with cash flow as the economy has slowed, almost to a stop.
That decision will, for the present, rest with Foreign Secretary Dominic Raab, who as First Minister, is standing in for stricken Prime Minister Boris Johnson.
Johnson spent his second night in intensive care last night. At yesterday’s press briefing, Raab said that Johnson’s condition is stable, and he is breathing without mechanical assistance. Concerns are rising over a power vacuum despite assurances from the Cabinet collectively that they are in control and carrying out the plan agreed with Jonson prior to his condition worsening.
Given Johnson’s charismatic personality and the Cabinet’s relative inexperience, the financial markets are reacting to every nuance of Johnson’s condition with traders currently seeing this issue as the biggest influence on the currency.
Yesterday it traded between 1.2384 and 1.2165 versus the dollar, closing at 1.2332.
White House continues to see reopening sooner than later
He also said he also believed that it could be two years before the economy is able to truly regain its footing. With the IMF commenting that the return to pre-pandemic levels could take until last 2022, the markets’ suffering is going to be a long drawn-out process.
Bernanke went on to say that there is plenty of room for the Fed to continue to expand its balance sheet and facilities given to banks to continue to lend are a vital lifeline to Corporate America.
The biggest area of concern is small businesses who have neither the wherewithal or tools to be able to survive such a hit to profitability and cash-flow drying up.
White House Economic Advisor Larry Kudlow and Treasury Secretary Steve Mnuchin joined forces to provide a slightly more upbeat view on the economy yesterday commenting that the U.S. will reopen for business as soon as humanly possible. This is a typically American response to any such crisis with commerce and business being seen almost entirely as the backbone of the country.
The dollar continues to fulfil its triple role as domestic currency, safe haven and global medium of exchange for trade transactions.
Yesterday, it fell to a low of 99.76 and closed at 99.97 as hopes rose that the infection peak was close or already passed in Europe’s two worst hit countries. This led to a slight improvement in risk appetite, although there is still a very long way to go.
Bailout fund to be used but no Coronabonds
German Banks are somewhat ironically the worst hit according to data released yesterday by the ECB. Banks’ return on capital is less than 1% in Germany whole Italian banks see their returns at around the industry average of 4.5%.
It may be that German Banks’ reporting bears a closer resemblance to reality than some of their Eurozone neighbours as new rules on writing down of bad loans and their exact definition is taken less literally elsewhere.
Following on from last weeks’ nosedive in services activity, construction activity in Germany, France and Italy suffered a similar fate as the lockdown continues despite a small improvement in both cases and fatalities in Italy, which remains Europe’s worst hit nation. Spain doesn’t produce monthly data for this sector, but if it did it is certain that it would have made this group.
Construction suffered its biggest fall in activity since 2009. It collapsed from 52.5 in February to 33.5 in March, an unprecedented collapse in a single month.
While the U.S. is fully capable of making this downturn into a short-sharp-shock which, despite a two-year period of pain, will recover as the nation pulls together, the weakness of the Eurozone economy on entry into the pandemic and the splits that have appeared since mean that recover will be slower, take longer overall and could see the economy never recover its full potential.
The euro rallied away from the first significant level of support on its path to parity yesterday. It rose to a high of 1.0926, closing at 1.0891
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.”