Cummings effect fading, Brexit concerns on the rise

Boris Johnson is getting closer to putting the entire Dominic Cummings lockdown breach to bed through his sheer bloody-mindedness. His move along, nothing to see here metaphor has worn down reporters who live by the maxim that today’s news is tomorrow’s chip paper.

The voracious political press have done all they can to damage the Government and Johnson’s Chief Advisor simply because he is seen as a shadowy figure who is never held to account. Well, he has certainly been forced to account for his actions between the end of March and the middle of April and while the Governments poll rating may have fallen a few pips, in the long run very little will change.

As one door shuts, another opens and the lack of progress in Brexit talks brings a no deal outcome closer and closer. While the EU has always maintained that such an outcome would be more damaging for the UK than the EU, the tables have been turned a little and given the slow rate at which the Union is expected to emerge from the lockdown and return to growth, the risks are now close to equal.

We may never know if the Prime Minister’s vow to leave on 31st December with or without a deal is purely bluster but if we do find out it is certain he will go down with the ship. Johnson’s confidence in the UK almost matches that of one of his heroes, Margaret Thatcher. He is proving to be single minded and love or loathe him any opposition leader who crosses swords will know they have been in a fight.

There have been errors made in the handling of the Pandemic but the mixed messages about following or not following other countries has been proven inconsequential as the UK Government has ploughed its own farrow.

The pound has been trading in a narrow range, hemmed in by the size of short positions and the fear of negative interest rates. When nothing happens on those two fronts a quiet day is in prospect. Yesterday, it traded between 1.2343 and 1.2249.

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Worst quarter since 2008

Yesterday’s release of an update on Q1 GDP data showed that the economy contracted at 5%, slightly worse than the original estimate of 4.8%.

The difference between the numbers is negligible, yet this serves to remind markets that the Q2 data which is still a couple of months away from release will be significantly worse.

The reason for the revision was hardly surprising. A plunge in spending from both corporate entities and individuals was underestimated.

With total deaths now in excess of 100k, the concerns about the degree of control being exercised over the spread of Covid-19 is beginning to drive worries about the pace of the recovery in the U.S. As President Trump continues to insist that it will be gone as quickly as it arrived, he is being proved sensationally wrong time and again.

Over the past week, another 2.1 million Americans applied for unemployment benefit, bringing the lockdown total to in excess of 40 million in a ten-week period. If there is to be a silver lining to this enormous cloud, it is that total claims declined for the eighth week in succession.

The additional $600 per week subsidy that workers are receiving, which constitutes just about the only consumer spending happening at the moment, runs out on July 31st and a comment from White House Advisor, Larry Kudlow recently virtually confirmed it won’t be renewed. If the overall situation hasn’t improved materially by then, the economy will end Q2 with a major negative hanging over it.

Yesterday, the dollar index fell to a low of 98.37, its lowest level since the end of March. While there is no particular reason for this decline, it is likely to be the longer-term reaction to the lifting of lockdowns in several G10 nations. This is ironic since the U.S. lockdown (in certain States) is likely to continue for some time yet.

EU crawling out of lockdown

The lifting of lockdown restrictions in several Eurozone nations has illustrated perfectly just how several countries reacted to the pandemic.

The publicl completely understood the reason for Draconian measures in Italy and Spain in particular and now there is a little more freedom a majority of the population are worried that the restrictions have been lifted too soon.

This has led to an extremely slow recovery, even in its initial stages.

With the European Commission announcing its response to the crisis this week, with a move to include the seven year budget, to which all members of the Union contribute, as part of the measures concerns are growing about whether the Eur 750 billion of additional funding will be sufficient.

By using the budget as part of the recovery fund, it is fairly clear that there will have to be an emergency top up in a few years as the money runs out and that is without a further crisis which could be looming.

A banking crisis is a definite possibility. Banks have a massive bad loan hole in their balance sheets. They have been given additional time to account for this but the erosion of capital as their share prices have been driven lower so far this year means that with lending and fee income both falling with economic activity there will be no profits with which to replenish the pot.

Yesterday the single currency managed to break above the 1.1020 level and reach a high of 1.1090. With the rumoured sellers not appearing there was a little follow through but since this is the highest level the single currency has traded at since lockdown began, the reaction was a little disappointing.