Cautious approach could hit Sterling

Prime Minister Boris Johnson took charge at the daily press briefing yesterday to both reassure those concerned about the lifting of the lockdown too soon and promise business that the Government is on top of the economic fallout.

With the second three-week lockdown period ending next week various groups had expressed concern that the UK, which Johnson confirmed is now past the peak of infections, is falling behind the rest of Europe in lifting restrictions.

That may be the case by a week or two, but that question may not even be relevant in the long term. Taking Germany as an example, their lifting of lockdown restrictions has so far been limited to small shops, museums and zoos. That is not going to see the country leap ahead in industrial activity or manufacturing and the economy was hardly in prime condition before the lockdown.

At the press briefing, Johnson was asked if his prioritising of public health over the economy was going to see the UK suffer in the longer term?

He responded by saying that the Government’s priority has to be to protect the health of the population while considering the roadmap of how the lockdown will be lifted.

He announced that the plans for doing that will be announced next week. He was keen to emphasise that the plans will be released but with no committed timeframe.

Sterling remains driven by risk appetite and it rallied versus the dollar as both globally and nationally three is light at the end of te tunnel. It rose to a high of 1.2643 and closed at 1.2593

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Public confident that the Fed is willing and able

In the relative chaos and confusion of 50 American States each going their own way, with a President who is unwilling or unable to either coordinate any Federal planning or response, there is one U.S. institution that stands head and shoulders above the rest; the Federal Reserve.

Exhibiting an understanding of the spread of the pandemic earlier than any other nation’s Central Bank and acting swiftly and decisively, Jerome Powell and the FOMC have struck exactly the right balance of action and reassurance.

This week’s FOMC meeting assured business and the population that going forward any further action will be taken as and when necessary.

Economists may have concerns about the open-ended nature of the QE plan but bringing a lawyer’s eye and attention to detail to the issue has been absolutely correct. President Trump may not have covered himself in glory in his first term, but appointing Powell could be his single best achievement.

Yesterday, Trump claimed to have seen evidence that the Covid-19 virus was created in a Wuhan Laboratory, although he is unable to confirm how it was released and if the spread was a mistake or a deliberate act. This contradicts to a large extent the view of the U.S intelligence services who already published their view that the virus was not either man-made of genetically modified.

Weekly jobless claims were released yesterday and showed a fall from the previous weeks but were still over three million. This brings the total since the lockdown began to close to thirty million and with the employment report being released next week concerns over the fall in activity and its effect on Q2 GDP are evident.

Manufacturing PMI is released later today, and this is likely to see a considerable fall. Last month’s read was 49.1 with this month expected to be in the mid-thirties.

Yesterday, the dollar index reacted to an improvement in risk appetite. It fell to a low of 98.80 and closed at 99.01

Sentiment likely to collapse further

The Eurozone contracted at its fastest rate ever in the first quarter. GDP fell from +0.1% in Q4 ‘19 to -3.8% in the last quarter. As with the U.S. data issued the previous day, this historical read was wholly unexpected, and it is well known that the present quarter will be significantly worse.

France, Spain and Italy each reported contractions of a far greater rate than the Eurozone overall.

Next week’s release of sentiment and activity indexes will go some way to bringing this quarter’s activity into sharp focus.

The Lifting of restrictions in several nations have been tentative so far and will have had little effect on consumer sentiment as markets await a genuine roadmap from the larger economies as to when they will be lifting lockdown on industry and manufacturing.

Yesterday’s meeting of the ECB failed to do anything other than illustrate the chasm between the EU Commission and the Central Bank.

Markets remain in the dark following the meeting. There was a stark warning that the economy is in freefall with growth likely to contract by 12% year on year. The volume of bond purchases was left unchanged and the length of the programme remains unknown. The ECB differs from the Fed in that it has minimum ratings for debt it purchases while the Fed will buy bonds with a junk rating.

The current programme ends in October and the volume of debt issuance needed by individual nations going forward means that without the ECB to mop it up, there may be an unmanageable strain on bond markets.

The measures that have been introduced to subsidize wages in order to persuade employers to cut hours not jobs are taking a long time to get started as unemployment continues to rise across the entire bloc.

Without saying so in so many words, the ECB appears to have reached as far as it can and is now reliant upon the EU commission taking up the initiative.

Despite poor current data and fears about growth and employment going forward, the euro managed to rally yesterday. It remains shy of the 1.10 level and it is believed that there are significant sell orders above that level., The single currency rose to a high of 1.0972, closing at 1.0953