Analysts calling for Brexit extension

An analysis of the prospects for the developed world and its efforts to escape the effects of the Covid-19 pandemic has concluded that the UK may be one of the worst affected of the affluent nations.

The study released yesterday concluded that due to the UK’s lack of a manufacturing base it is extremely reliant upon the performance of the global economy and its predominantly service driven economy will lead to a longer lead-in period to a complete return to normal than other nations.

As the country transitions from an exit strategy to a full return to normality, the Chancellor of the Exchequer, Rishi Sunak will be faced with the dilemma of how to retain support for those who have lost their jobs or have to provide childcare. Schools are possibly going to take longer to return than the start of next term in September, while a greater degree of support for businesses whose cash flow is unable to finance their major outgoings will also be necessary.

There is bound to be a funding gap which will require bridge finance, possibly supplied by banks who are already concerned about growing bad loan provisions. This transition finance is going to be vital to the economy if it is to emerge from the pandemic within the next eighteen months.

With the Eurozone releasing data that showed its economy shrunk in Q1 by slightly less than previously announced, there is greater interest in the UK’s release of updated data tomorrow to see whether it is going to fall to the bottom of the growth league table. A position previously occupied by the EU overall, driven by weakness of certain individual members.

Yesterday, the pound rallied against a weakening dollar but reasons to buy it or at least retain long positions are fading. It reached a high to 1.2813, but drifted back to close at 1.2747

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Fed to continue asset buying spree

Jerome Powell’s is becoming renowned for his lawyeresque tactic of observing the effect of his actions and seemingly becoming inactive before pouncing to provide aid to the economy just where and when it is needed.

While it may have happened more by luck than judgement on the part of President Trump, the appointment of a lawyer rather than an economist to the post of Chairman of the Federal Reserve may have been a masterstroke.

Powell’s comprehension of the finer points of monetary policy may have had to be learned from his colleagues, but his stature and eloquent delivery of the FOMC’s decisions and its actions have bred a degree of confidence from market practitioners that is necessary if markets are going to behave rationally.

The same is true of the most recent FOMC meeting which concluded yesterday.

As expected, there was no change in monetary policy, but the Fed remains primed (and the market believes in their ability) to act should the economy turn towards a more convoluted return to fitness.

While acknowledging that the return to full growth will be long and tortuous and the economy will contract by around 6.5% this year, the Fed won’t shy away from further extraordinary measures should they become necessary.

Powell disagreed with the White House analysts in predicting that unemployment will be below 10% at the end of the year, but only marginally, His prediction is for the jobless rate to fall to around 9.3%. The measures taken to combat Covid-19 will reverberate throughout the economy for years rather than months to come and the caution that will bring will need to be dealt with if the country is to reach its full potential.

Clearly on Powell’s mind is the upcoming Presidential election although he made no reference to it as a headwind to the economy. It is sure to be a closer result than could have been expected nine or even six months ago and will be the most important election since Kennedy won in 1961.

Today’s report on weekly jobless claims is expected to see the number fall again possibly to around 1.5 million new claims but given the current environment it is virtually impossible to predict.

Yesterday, the dollar index continued its retreat. It reached a low of 95.71, closing at 96.08.

Deutsche Bank sets aside most for a decade

The economic collapse being witnessed in Germany will prove to be symbolic for the entire EU, as yesterday Deutsche Bank until recently one of the pre-eminent global financial institutions announced that is having to set aside more than it has done in ten years to allow for bad and defaulting loans in its portfolio

This may be the nadir for the bank which retreated behind its own national borders last year in order to survive, long before Covid-19 became an issue. It is interesting to note that the volatility seen in markets from which Deutsche withdrew would probably have allowed it to make a larger return than it has from becoming an exclusively national or at least pan-EU bank.

It will set aside 800 million euros to provide for bad loans while at the height of the financial crisis, its highest single quarterly provision was 630 million.

The bank has been relatively brighter in its view of the economy and therefore the performance of its loan book than several of its peers and appears to be front running its own issues in order to get ahead of the curve. While this is prudent, it may call into question the bank’s ability to fund any transition loans that have been touted by Chancellor Merkel as the country comes out of lockdown and faces similar issues to the UK.

The ECB has predicted that the EU economy will shrink by between 8% and 9% this year with the current quarter being the worst affected. The Central Bank has also suggested that its estimate should be used as a base figure for bad debt provisions and Deutsche Bank appears to have heeded that advice.

The euro looks to be becoming exhausted by its recent climb and looks set for a correction. Yesterday it reached a high of 1.1422, closing at 1.1375.