Market braced for even worse services output data

Yesterday’s release of output data across the G7 showed the initial effect of the Covid-19 outbreak and the UK was among the worst sufferers.

The manufacturing sector in the UK which admittedly is dwarfed by services slowed to its lowest rate since the 2008 financial crisis. The issues which led to this fall were primarily transport delays and a shortage of raw materials. If this level of contraction is repeated when tomorrow’s services data is released, it may be that the UK is already in a technical recession. Job losses were also a major factor in the report.

The pound was 6% lower against the dollar in Q1 compared to the end of Q4 ‘19. As the dollar rebounds that figure is likely to grow as Q2 bears the brunt of the lockdown measures introduced a couple of weeks ago.

The nature of the UK’s response to the pandemic is influencing the pound but only from the point of view of when the recovery will start and how long it will be before the economy is back to December or January levels. The comparative effectiveness of each nation’s response is impossible to judge since there are so many factors in play.

Tabloid sensationalism remains, with testing, infections and the rates of death not comparing favourably with several other nations.

Tomorrow is shaping up to be a defining moment economically for the west as the UK, U.S. and Eurozone as well as Germany Italy, Spain and France release their most significant monthly statistics.

The emergency funds that the Government allocated are starting to flow but the performance of banks at this time is being criticized and compared to the help financial institutions received in 2008/9

Yesterday, the pound fell marginally to a low of 1.2330 versus the dollar, closing at 1.2375 as the market took something of a breather.

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9% March rally likely to repeat

The dollar does well in recessions, as was proved in the last major global economic shock. The financial crisis also showed that globalization, while having several benefits to the bottom line of many major Corporates in the west, the U.S. in particular, there is a human cost which may be becoming too high.

The Covid-19 pandemic has again shown that when the chips are down, treaties, agreements and cooperation go out of the window.

The role of the dollar as the global reserve currency is helped by global fears of a shortage of liquidity which never actually happens, but Governments, banks and large corporates stockpile in order to be able to fund themselves.

The U.S being both vast and diverse is struggling to deal with the Covid-19 outbreak at a Federal; level. Getting equipment and personnel to the places they are most needed is proving to be a challenge. The President commented yesterday that the country must brace itself for a tough two weeks.

Officially, data released yesterday showed a projected outcome of between 100k and 200k fatalities. While this is not new news, it is still shocking as the rate of infection and fatalities grow exponentially.

Most sectors in the ISM report released yesterday were as bad or worse than expectations, although private sector job losses showed a fall of 27k, the first decrease in three years, against a market expectation of -150k

Tomorrow’s NFP report will be the acid test for the economic reaction to the pandemic but market expectations have been relatively calm. A 100k fall in new jobs is the consensus. It remains to be seen just how the headline number fares, but in the medium term the dollar should remain well supported by global liquidity concerns.

Yesterday, the dollar index rallied again but again failed to test the 100 level. It reached 99.84, closing at 99.46.

Frugal four becomes Frugal five

The fact that EU Heads of State gave their Finance Ministers two weeks to come up with options for a concerted plan to deal with and survive the Covid-19 pandemic is highly illustrative of their reaction so far to the crisis.

While no one would say that there is a deliberate dragging of the feet by the group, it appears to be more of a rabbit caught in the headlights reaction as each looks at the other for leadership.

During Brexit the EU Commission and Council Presidents were both highly visible and vocal in outlining plans and reactions. While Covid-19 is on a different level to that, the new EU President Ursula von der Leyen has so far been far from visible while even the name of the new Council President is easily forgotten (it is Charles Michel). Few can recall a single comment from him while Donald Tusk (love him or loathe him and his style) was constantly giving interviews.

Ultimately the pan-EU response to the pandemic appears to rest upon the issuance of Coronabonds. The four nations who oppose the issuance of obligations by the EU to fund an EU wide response; Germany, Belgium, The Netherlands and Austria have been joined by Finland as the Frugal Four became the Frugal Five.

The fatality rate in Spain and Italy continues to climb and the human cost of this tragedy will be equalled and possibly surpassed by the economic fallout. These two nations accompanied by Portugal, Greece and Cyprus will again suffer deep recessions without any bailout being forthcoming.

There is little doubt that there is now a definite two-tier EU roughly split geographically between North and South.

The single currency looks set to fall further as the dollar remains strong and likely to begin a phase two rally. Yesterday, it fell to a low of 1.0902, closing at 1.0962.