Government fighting to avoid a second national lockdown

The Government admitted that its Covid-19 testing system was at breaking point last week as the number of new infections rose exponentially.

With 20% of the country already suffering a more severe set of lockdown rules, Prime Minister Boris Johnson has some important decisions to make about how to deal with the growing threat of a second spike.

Chancellor of the Exchequer Rishi Sunak is seemingly trying to persuade the Cabinet away from a complete lockdown, arguing that it would be a disaster for the economy, a fact already acknowledged by Johnson.

Sunak has apparently given Johnson dire warnings about the consequences of another major nationwide outbreak as media showed pictures of supermarket shelves being stripped in a disturbing reminder of the early days of the pandemic.

Health Minister Matt Hancock confirmed on TV yesterday that a total nationwide lockdown was the final resort, but he also confirmed that the health of the population, not the economy, is his priority.

Last week, the pound was more volatile than it has been for some time, it traded between 1.3007 and .2776. Resistance has now built up with many investors now looking to reinstate short positions above the 1.30 level.

Bank of England Governor Andrew Bailey will make a speech early tomorrow morning and as usual, investors will be hoping for more clarity about the Bank’s attitude to negative rates. There is a feeling amongst analysts that Bailey and the MPC see negative interest rates as a decision that once made could be difficult to reverse.

The pound closed at 1.2916 on Friday, appreciably stronger on the week, but that was mainly due to a weakening dollar.

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Election unlikely to provide any material boost to growth

The different paths being trod by the U.S. economy and its equity markets continues to widen as, inadvertently, the Fed’s loosening of monetary policy and the commitment to keep rates low has given investors the incentive to pour money into equities.

On the other hand, the continued lack of a support package for small business and the unemployed is bringing the threat of further layoffs as record numbers of small and family owned businesses close.

The rise in those claiming unemployment benefits has reached record levels and although there is a degree of scepticism over the report that 30 million people were claiming at the end of August, it dwarfs the pre-pandemic number which was around 1.5 million.

Retail sales numbers have taken a significant hit and a closely watched survey of consumer confidence flat-lined through this month.

There is a vicious circle developing whereas confidence falters, consumers tighten their belts which forces local businesses to cut production leading to layoffs which adds to a fall in confidence and so on.

A lot has been written about the continued wrangling over a pandemic relief Bill in Congress, but it is also support for the many businesses teetering on the edge that is vital to keep the recovery going.

The economy didn’t suffer as badly as many predicted when Federal aid dried up, but incomes for millions of Americans were sharply reduced and some businesses were left high and dry. They can’t keep employees on payrolls when demand is still well below pre-crisis levels.

While Democrats and Republicans are deeply divided over the amount that needs to be spent propping up the economy, in fact it is the most obvious policy difference between the two Parties, it is hard to see Biden being able or willing to simply throw cash at the problem, if he wins in November.

Last week was fairly turbulent for the dollar index as it was unable to make ground on the approach to resistance at 93.80. It traded between 93.60 and 92.76. This range perfectly illustrates the lack of commitment on behalf of traders to positioning ahead of the election. It closed at 93.00

This week, durable goods orders dominate the data calendar. A speech by Fed Chairman Jerome Powell later today could also spark activity although it is likely that he will reiterate the Fed’s policy stance on growth and inflation.

ECB gives green light to euro bulls. Currency weakens

At the most recent meeting of the ECB General Council, it had been expected that its President Christine Lagarde would comment on the recent strength of the single currency and its effect on the region’s recovery from Covid-19.

In the event her only comment was to say that although the Bank was aware of the currency’s gains, they would take no action to curb them. In the past, any Central Banker making such a comment would have lit the fuse under a significant further rally.

Although the euro managed to take a peek above the 1.20 level versus the dollar following the meeting, it has declined almost since those remarks were made.

The reason behind that could be that the 1.20 level is a natural level for the medium to long term price action for the euro, but it also possible that the market is losing confidence in the ability of the Central bank to use policy to affect the value of the currency and, even more enlightening is the possibility that it has lost interest.

The value of the currency is a major determinant of a country’s ability to sell its goods overseas and also maintain control of inflation. A balance needs to be struck which makes it cheap enough to encourage exports, but not so cheap that it raises the cost of imports to such a level that it affects inflation.

The ECB appears to have abandoned that balancing act. Having said that, in the current low inflation economy that may be considered one less thing to worry about. Furthermore, the fact that the EU Commission is trying to encourage greater intra-EU business makes the currency value less relevant.

Last week, the euro traded between 1.1900 and 1.1737, although it ended the week just seven pips lower at 1.1839 having traded almost the same range as the week before.

This week PMIs will be released on Wednesday for both Germany and the entire Eurozone. They are expected to show a very slight increase on the August data. This will be further confirmation of a slowdown in the recovery and the susceptibility of the economy to a second wave of Covid-19.