Uneven recovery likely

The proposals being put forward by the Government to partially lift the lockdown have come in for significant criticism for being confusing and unclear and for putting people’s lives at unnecessary risk.

The proposals which switch the emphasis from stay at home to stay alert, place a far greater responsibility on the public to use common sense to maintain social distancing and minimise contact and risk of infection.

There is a clear conflict between the Government’s responsibility to safeguard the population while trying to ensure progress to try to protect the economy although this is seen as a secondary goal.

The most important of the tentative guidelines to the economy is that the restrictions on the hospitality sector will remain in place until July 4th at least.

While it is fairly certain that this area will see a V-shaped return given the desperation of people to start to frequent bars and restaurants again, the guidelines for allowing them to reopen will be among the most stringent. The other question remains with another seven weeks before a reopening is considered, how many businesses will remain viable by then.

The press’ feeding frenzy over the proposals has added to, rather than clarifying the Government’s proposals and this has led to the start of divisions along political lines. While it was considered irresponsible to criticise the Government during the growth of the infection, the road back is certain to be a political hot potato.

So far, the financial markets are prepared to wait and see in light of increases in infections in two of the more successful nations in fighting the virus; Germany and South Korea. Sterling remains driven purely in reaction to backwards looking data as leading indicators prove difficult to follow. This led the pound to a low of 1.2285 and a close of 1.2335 versus the dollar yesterday as the reaction to the partial lifting of restrictions filtered through.

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Self determined lifting of restrictions endangering millions

While Republican run States have railed against the lockdown restrictions and seen protests from residents, more Liberal Democrat controlled States have been more willing to comply.

This is a fairly typical picture of the U.S. political scene as any form of public support for business or the economy at either State or Federal level is seen as going against the very fabric of the country.

The desperation to get back to work is strong across the entire nation and this has led to the opening of some bars, restaurants and retail outlets which go way beyond the current level of restrictions.

While in several affected states the infection rate has not yet reached a peak, it is impossible to say the flouting of regulations is risking a second spike but it will most certainly prolong the overall risk.

The fallout from not only Friday’s employment report but the fairly casual reaction of the Administration continues. President Trump’s reaction to the loss of more than twenty million jobs in April was that the number was wholly expected. He is fairly confident that most of the job losses would be recouped in the coming months. This has been labelled, particularly by States in the East of the country as being blithe and callous.

Trump appears to be losing ground in several States that will be key battlegrounds in the November election. His stronghold in the Midwest is a major concern. This is clearly affecting his mood as he continues his my way or the highway approach to the media.

The dollar index rallied yesterday, reaching a high of 100.28 as risk appetite fell. This was partly due to concerns over an expansion of the disputes between Beijing and Washington and a possibility that they may become wider ranging. The index closed at 100.22.

Lack of cooperation could lead to boycotts

While EU officials try to engender a feeling that the worst is over, an apparent concern over a second spike in infections in Germany, albeit from a very low base will be seen in many EU States as a warning that the road to recovery will be long and arduous.

The hardening of attitudes between several individual Eurozone members is a concern to the EU Commission which continues with its plaintive cry for greater cooperation. It is rumoured that Spain and Italy are on the brink of boycotting goods from certain countries that they have seen as unhelpful as they have struggled alone with the worst effect of Covid-19 the entire region.

An article in the press gave a very graphic description of the likely shape of the recession over the weekend. While there is talk of a V-Shaped or in certain countries a U-Shaped recovery, the recovery in the Eurozone as a whole is being described as resembling the Nike Swoosh.

This implies a short period at the lowest point, but a long slow and arduous recovery.

While businesses will start to recover slowly, as is likely in the UK, the services industry will be the last to recover. There several reasons for this and they all revolve around the controversial subject of social distancing. There is talk that such measures could continue will into next year, especially if progress in creating a vaccine continues at its current pace.

There are two major issues facing the region; political and financial. The political issue centres on the lack of cooperation and a concerted plan, while financially the lack of centralized support package is going to hit the weaker economies hard.

Leading indicators being released in the coming weeks are going to be used as confirmation of just how bad the situation is becoming rather than giving any fresh insight.

Yesterday, the single currency fell to a low versus the greenback of 1.0801 and closed at 1.0808. There are rumours of major sell orders that will accelerate the euro’s fall between 1.0780 and 1.0760, a level which appears protected for now.