Rate cuts to come but Central Bank on top of the crisis

Despite rumours that some of the more expansive plans of previous Chancellor Sajid Javid having been reined in, tomorrow’s first budget of Boris John’s term as Prime Minister is expected to finally draw a veil over austerity.

Several measures to be announced will be supportive for the economy. While these are unlikely to counter the effect on growth that is coming from Coronavirus, they will mark the start of the Government’s pledge to level the playing field between north and south, and begin to address the issues of adult social care, the NHS and policing.

There will be a tax cut in the shape of a rise in the National Insurance threshold. That won’t do anything for the lowest paid, since the threshold is already above their wage levels.

There will, no doubt, have been new measures written into the budget to help the economy recover from the coronavirus effect, but it is difficult to put a monetary cost on the slowdown since it is still impossible to fully gauge its outcome.

Futures markets have become far more dovish on short-term rates as the numbers affected by the virus grow almost exponentially day by day. A 50bp cut in rates is now almost fully priced in and there is no real opposition to that argument from commentators and analysts.

Government bond yields turned negative for the first time ever yesterday as panicked investors moved, dumped equities in favour of more secure assets.

The pound continued its recent rise versus the dollar although it lost a little ground against the single currency. It reached a high of 1.3200 but drifted back to close at 1.3126. The single currency gained close to 0.1% closing at 1.1462.

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Oil price drop due to supply war

The dollar has taken a massive battering over the past few weeks as the global stock and commodity markets have gone into meltdown following the spread of Coronavirus which is now close to pandemic levels.

The dollar index opened in January last year at 96.13 and never traded below that level all year. Yesterday it reached a low of 94.63 and closed at 95.09. Traders no longer see the dollar as a safe haven currency although that is likely only temporary.

The underlying U.S. economy remains the strongest in G7 and while predictions of when new infections will peak, it is not seen that this will be anything other than a short or, at worst medium term, crisis.

Global stock markets have been in freefall with the DJI losing a little over 20% of its value since the middle of last month.

The price of oil has fallen from $54.68 to a low of 27.69 over the same period although it recovered a little yesterday to close above $30 and rally a little further overnight.

The CHF and JPY continue to rally confirming their safe haven status. Neither economy will enjoy the current strength of their currency given the threat to their exports. Although there is a significant human cost to the current situation, in both currency and commodity markets long-term, this will be considered something of a rebalancing since there is little doubt that both the dollar and U.S. equity markets were getting well ahead of themselves.

The Fed is increasing cash injections into the banking system almost daily to ensure sufficient liquidity and bank reserves.

The collapse of an OPEC price agreement has led to something of a production war between Saudi Arabia and Russia, as Riyadh has promised to slash prices and boost production.

Overnight there have been signs that the markets are beginning to stabilize somewhat but it is still too early to predict that the economic crisis is over.

The dollar index has reached a high (05.30am BST) of 95.97 while the pound and euro have both eased a little. The Japanese stock market has rallied 0.75%

Consumer confidence taking a hit from Coronavirus

Finally, France and Germany acknowledged yesterday that Coronavirus is an issue for the entire region and must be tackled centrally, with plans to contain its spread the responsibility of the entire EU.

The number of cases (and deaths) in Italy is rising significantly daily and the quarantine in the north has now been expanded to take in the whole country.

The French Finance Minister suddenly aware that France is part of the problem finally acknowledged that Europe needs a call to arms to pull together to fight the economic effects.

The outbreak has disrupted companies’ supply chains, forced airlines to cut capacity and prompted shoppers in some countries to stockpile essential food items.

There is a certain irony to that fact that the rise in the value of the euro over the past weeks is due to its being considered a safe haven currency. In days of old, were such a crisis to have taken hold, naturally the Deutschemark would have been gaining along with the JPY and CHF due to its budget surplus. The surplus remains but it seems even a weak German economy provides solace to those becoming more and more risk averse.

Predictions of a recession over the first two quarters of this year are growing and becoming the base case for several commentators. The ECB meets this week and they will be under considerable pressure to lower rates further although there will be doubts about the effectiveness of taking rates even further into negative territory.

The Banque de France slashed its outlook for growth this year from 0.3% to 0.1% prompting Minister Le Maire to wake up from the tauper that was engulfing the region.

Yesterday the single currency continued its march higher, although it has corrected a little so far overnight. It reached 1.1496, closing at 1.1451. So far it has reached a low of 1.1337 this morning.