No Brexit progress, no deal real possibility

Sterling struggled to make any headway above its high from the previous day yesterday as the markets concerns over a no deal Brexit combined with the coming recession drove it lower.

On top of those two concerns, the market is still considering the effect should the Bank of England decide to drop official interest rates below zero. However, the more optimistic comments from Chief Economist Andrew Haldane on Tuesday settled traders worries to a certain extent.

Last week’s PMI data which drove Haldane’s confidence is perhaps being a little overplayed as the improvement was only relative to the truly horrendous data from the previous month.

The level of UK Government borrowing is something of an unknown quantity particularly under a Conservative Administration. While austerity is the usual reaction to bringing borrowing levels down, particularly since they consider tax increases as anathema, how the issue will be tackled in the longer term will exercise analysts’ thoughts for months to come.

Prime Minister Boris Johnson is still under pressure over his support for his Chief Advisor, Dominic Cummings. It is clear now that Johnson is not going to bow to political pressure and sack Cummings no matter how many of his MP’s call for it.

As was mentioned yesterday, Sterling remains fragile with no particular direction or trend currently discernible. it seems to be in reactive mode, with day-to-day news or economic bulletins driving its short-term direction

Yesterday, it fell to a low of 1.2204 and closed at 1.2245, retracing all the gains from the previous day.

With the data calendar extremely light this week, the market will await next week’s final manufacturing and services output result to see whether Andrew Haldane’s optimism is justified.

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No depression but major and lengthy downturn

There is a continuing confusion over how the U.S. economy will fare going forward with several prominent commentators, Officials and Central Bankers each having their own view

It is interesting that despite this state of confusion, the market still believes that there is both a degree of control; and a back-up plan should the economy turn south.

The focus of the spread of Covid-19 has shifted in the past few days to South America. Brazil and Venezuela have seen huge spikes in infections, but numbers of deaths remain unclear.

In the U.S., last weekend saw several states inundated with people ignoring social distancing regulations and there is a distinct fear that the lockdown will be lifted by default. The worst hit States remain New York and New Jersey. With those two States accounting for a quarter of all deaths their reticence to discuss lifting restrictions is understandable and there is a real possibility that there will be travel restrictions enhanced between individual States.

Later today, data will be released for durable goods orders, weekly jobless claims, and an update on Q1 GDP. None are expected to make pleasant reading but there is unlikely to be any surprise either.

The market is already gearing up for next week’s May employment report. There are no estimates of the headline number that could be considered reliable, but it is likely that the unemployment rate will remain at or close to 19%

As more nations announce relaxation of lockdowns the market is remaining concerned about how any second spikes will be handled, and this has seen risk appetite fall again. The dollar index rose to a high of 99.34 although it closed barely changed at 99.08

Still subject to approval by the entire Union

The European Commission has started to react to the seriousness of the economic impact of the Covid-19 pandemic by announcing a series of measures totalling the equivalent of two trillion dollars, well above sum announced in the agreement reached between Germany and France recently.

The package will be made up of a Eur 750 billion recovery fund and a Eur 1.1 trillion budget that has been proposed for the next seven years. The one caveat to this announcement is that it is still to be formally approved by the members of the EU.

It is unclear just where the previously dissenting nations stand on the idea of grants and how the recovery fund will be made up.

There is clearly a lot of work to be done until funds reach the places they are needed most. The market’s initial reaction was to buy the euro up to just above the 1.10 level versus the dollar. However, there was a distinct lack of follow through as rumours of huge orders to protect option positions swept through the market.

Having traded up to 1.1030, it fell back to 1.0961 before closing at 1.0987. It will need further encouragement from Brussels to drive it to a close above the 1.1020 level, although in the short-term, sell orders notwithstanding, traders appear relatively well disposed towards the currency.

While the euro remains driven in the main by risk appetite as it pertains to the dollar index and the euro’s proportional value within the basket, the market is continuing to be optimistic about a package of measures. The general feeling is that it will come but just what its makeup will be is causing concerns in the medium-term.

Data for services sentiment, consumer and industrial confidence and business climate is due for release. While it is fairly clear the data will be dismal, it will serve to provide an indication of the need for the approval of the rescue package as soon as possible.