Debt approaching 100% of GDP

Analysts believe that the pound is set to weaken further versus the dollar for two reasons: First, the greenback is likely to resume its surge higher in response to the coronavirus pandemic and, second, the levels of Government debt could spiral out of control in the wake of the authorities efforts to stem both the social and economic effects of the outbreak.

While other G7 nations face differing concerns, the UK is being subjected to scrutiny about its rising debt levels. It is ironic that Boris Johnson’s Conservative Party, having wiped the floor with Jeremy Corbyn’s free spending Labour Party in December’s election, is now being forced to increase debt levels to socialist levels without the benefit of improvements to public services that such investment would normally bring.

Just when the Covid-19 pandemic will start to ease is unknown but the Government’s Medical Officers say that there could be lockdowns at various standards of severity for six months.

That would necessitate further borrowing and push the debt to GDP levels close to Italy’s post financial crisis levels.

This is well understood by the rating agency Fitch who nonetheless cut the UK’s Sovereign Debt Rating on Friday, citing rising debt levels which they labelled unavoidable but damaging. The rating was cut to AA- with a continuing negative outlook.

Yesterday, the pound fell to a low of 1.2318, closing at 1.2415 as the market went through something of a lull which is unlikely to last.

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Quarter-end sees renewed demand for the greenback

The recent rally in the value of the dollar is unlikely to have ended as the traders recall the market’s reaction to the last seismic event, the 2008 financial crisis. While the circumstances were vastly different, the effect on the market of the subprime debt crisis and the near collapse of several major financial institutions created similar turmoil

At that time the dollar’s trajectory was similar with a dip following a significant rally followed by an even more violent surge higher.

The global economy is going to face a significant slowdown with individual Governments facing impossible decisions to find a balance between a complete collapse of the economy and the outcome of doing too little to aid society.

With economic activity grinding to a halt, the news that PMI data in China showed the economy returning to growth in China as the Covid-19 recedes has been greeted with a high degree of scepticism.

Demand for the dollar given the Japanese year end and quarter end for other financial institutions and larger Corporates means that dollar demand will be heavy today. This may mark the start of the second wave but predicting absolute levels for major currencies has become impossible. The markets have reverted to their basic rationale. There is very little speculation and even less investment taking place with levels determined by supply and demand.

The World Economic Forum predicted in a release yesterday that the U.S. economy could take three years to recover from the pandemic. If the current measures being taken by major economies are successful it predicts that the U.S. will return to pre-crisis levels by Q1 2023 with Europe possibly taking up to a year longer.

The dollar index rose to 99.32 yesterday and closed at 99.02. It has rallied again overnight as solid demand for dollars continues., It has so far reached 99.60 as the 100 level again seems like a significant barrier

Finance Ministers two-week window typical response

In typical fashion, the latest meeting of Eurozone Heads of Government and Finance Ministers, held by videoconference and lasting six hours, failed to come up with any concrete pan-regional plans to aid the Eurozone economy during and after the Covid-19 pandemic. Mcsh to the disgust of Italy’s Prime Minister Giuseppe Conte, the can was kicked down the road as a decision was taken to give Ministers two weeks to come up with options.

Conte had asked his colleagues for two things according to the Italian press; unity and swift action, neither of which were forthcoming. In an unprecedented attack, the press in Portugal labelled the Dutch attitude to budgets as repugnant.

The two-week delay means more fatalities in both Italy and Spain, the two most affected countries in the region, with the lack of agreement between individual nations, possibly leading to the biggest casualty of the entire pandemic; the death of the European Project.

While that statement may be overly dramatic, nations are ignoring the call from EU Commission President Ursula von der Leyen to show that the EU is more than a fair-weather union.

The wounds from the lack of cooperation during this crisis are likely to run even deeper than those from the financial crisis. It seems that such events dog those least able to cope economically yet the stronger nations refuse to compromise their ability to recover by helping those most in need.

In the words of Foreign Minister Luigi di Maio, a leading member of the right-wing Five Star movement, if Europe wants to use the old financial instruments, we will do it alone. It is unclear what he means but the sentiment is clear.

Yesterday the euro had a relatively quiet day trading between 1.1144 and 1.1010, closing at 1.1046. The entire market is braced for economic data releases from several G7 nations over the course of the week.