As Covid cases soar Brexit returns to bite Government

The game of bluster and counter-bluster that has gone on ever since the UK voted to leave the EU has burst back to life as the clock counts down on the negotiation period.

Each side blames the other, and while Prime Minister Boris Johnson continues to extol the virtues of a no deal departure, such an outcome would be fraught with dangers.

Johnson and his Chief Negotiator both firmly believe (in public) that no deal is more favourable than acceding to Brussels demands over competition law. The other main item of contention is fishing rights but while that is a significant stumbling block it could be considered a localized issue.

Johnson has also said he wants a deadline of the middle of next month for a deal to be agreed, but naturally, the EU disagrees.

Bringing market focus back to Brexit will be difficult as the UK sees cases of Covid-19 skyrocket. The Government believes it can halt the spread by localized lockdowns, scientists are more concerned about the majority of new cases being seen in the young with universities about to return they believe the infection rate could spiral out of control.

The disproportionate level of deaths, which remain low, compared to infections is no comfort as when this has happened in other countries it has been followed by a spread into all age groups and brought a later but significant rise in deaths.

These two issues are, individually, major threats to the economy and currency. When breaking at the same time, the effect on the recovery could be devastating, particularly when the Government furlough scheme ends at the end of next month.

Traders are showing their concerns over the recovery by closing long positions in the pound and this has coincided with a slow but steady resurgence for the dollar index.

Yesterday, the pound fell to a low of 1.3140, closing at 1. 3164.It has also given up recent gains versus the euro which saw it fall to a low of 1.1118. Support is seen around 1.1080.

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Trump trying to make his wins the key battleground

As the country gears up for the Presidential Election, which is now less than two months away, Donald Trump is concentrating on the country’s recovery from the Covid-19 pandemic despite the infection rate growing significantly in almost half of all States.

As far as the continuing fight to bring it under control is concerned, the President is pinning his hopes of a vaccine being ready sooner rather than later. The latest estimate from the scientific community is for a widely available vaccine to be ready by next summer while the Administration is saying mid-November. It is easy to see the significance of the disagreement.

The most recent data tends towards a slow but steady improvement in the economy and that is what both the Fed and Treasury believe is the best the country can hope for in the current environment. Trump’s hyperbole in claiming the fastest recovery in U, S history may be true but that is only because it followed the biggest ever contraction in a single quarter.

Employment remains key to both the perception and reality of any recovery and the disagreement over any relief for the unemployed remains a significant stumbling block.

It seems that while weekly jobless claims continue to trend lower the issue, as far as the Administration is concerned, becomes less and less significant. However, the Democrats in the House of Representatives point to the fact that more than a quarter of a million new claims are still being made every week.

This week’s release of inflation data will show that despite the level of liquidity currently being supported by the Federal Reserve price increases remain benign. While investors remain confident that the Fed is on top of the situation, they will continue to be supportive as they don’t see the need for fast action to curb any rapid increase in inflation, but should the situation change a test of the Central Bank’s resolve could be seen.

Yesterday, the dollar index continued its slow recovery from recent falls. It climbed to a high of 93.09, closing at 93.07. Resistance is around the 93.40 level.

German support for EU bureaucracy reflects their concerns

The German recovery from the Covid-19 pandemic has been championed as the leading light in the entire region’s fight back to growth following the major contraction seen in Q2.

While it is true of all G7 economies, it appears particularly salient within the EU that there is a lack of understanding of the fabric of the Q2 contraction and just how serious it has been for industry and manufacturing in particular.

Yesterday’s data for German industrial production, the standard by which other nations will be judged, saw an unexpected fall. A 1.2% rise in output in July was well below analyst’s expectation for a rise of around 5%. That would have been a fall from June’s 9.3% but that was inflated by satisfying pent up demand following lockdown.

The data will be of concern to the ECB whose Governing Council meets this week. Recent comments by officials point to a view that the entire Pandemic Relief Fund may not be needed as production, return from furlough, and numbers of employed improve across the region.

That view is now changing to a concern over this quarter’s GDP which may not see the rapid bounce-back that had been anticipated.

Analysts reported a rise in investor confidence in the most recent survey, the fact that it was still negative appears to have escaped their notice. Following a 43% fall at the height of the Pandemic, confidence rose from -12.1% in August to -8% this month.

The EU’s Chief Negotiator is still painting a no deal Brexit as a far greater concern to the UK than the EU and he has apparently gone as far as saying that trading with the UK on WTO terms would be acceptable.

However, the effect of the UK not having to comply with EU competition rules would be a significant blow to Brussels and clearly hand an advantage to Westminster.

The euro continued to correct its recent rise versus the dollar yesterday. It fell to a low of 1.1811, closing at 1.1817. Support is around 1.1780 and given the recent price action, a fall through that level could see losses accelerate.