UK lagging as Europe opens up faster

UK Prime Minister Boris Johnson is facing tough decisions on several fronts as he balances the needs of the economy and the effect of a continued lockdown with the economic fallout of businesses remaining closed for a longer period.

With little data to go on regarding how countries in Europe are faring having begun to open up a few weeks ago, Johnson faces a difficult decision that he will have to take blind about how to retain social distancing when non-essential retail reopens this Monday.

With schools remaining closed until September at the earliest, Johnson will soon have to decide about phase three of the lifting of the lockdown when the hospitality sector will be given permission to start to reopen.

Today will see a slew of data released. The monthly GDP data for April, together industrial production figures will both provide confirmation of just how bad Q2 will be.

It is estimated that GDP fell by around 18% in April from the previous month while industrial production fell by 15%. While not wholly unexpected this will confirm in black and white, just how far activity has fallen despite the efforts of the Chancellor to provide assistance where it is most needed.

With the pound struggling to improve on the highs it has made versus the dollar over the past few weeks, today could be the catalyst for the return of market negativity.

Yesterday, it fell back to a low of 1.2586, closing at .1.2602. With volatility having risen considerably, it is too soon to call time on the pound’s rally but given it has been based on a weakening dollar, the fact that the true state of the economy is about to be laid bare, this could be the start of its return to the low 1.20’s

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Uncertainty reigns across entire economy

The ability of the U.S. economy to deal with the Covid-19 pandemic in a single concerted manner remains in doubt as the number of infections reaches over two million and deaths now well in excess of 100k. There are concerns being expressed in several places about a second wave of infections coming in the Autumn as the weather starts to deteriorate.

Steve Mnuchin, the Treasury Secretary took a tough line yesterday when questioned about the Administration’s response to such a setback.

He said that once the economy has fully reopened, which he estimates to be in the next few months, it will not be closed again and any increase in infections will be dealt with on a regional level.

Following Jerome Powell’s warning that the length and depth of the effect of the pandemic on the economy will be extraordinarily uncertain , Mnuchin was at pains to show that a Republican Administration will be determined to haul the country back on track although he didn’t provide any information about how that will be achieved.

Yesterday, the U.S. Government announced that a further 1.5 million new claims for employment benefit were filed over the past week.,

This is a glass half full statistic. While it shows a continuing improvement from the highs at the start of the pandemic, one and a half million new claims is a horrific statistic historically.

Yesterday, as global risk appetite began to wane again, the dollar index started to rise having apparently based out earlier in the week. It reached a high of 96.82, closing at 96.75.

Is support being pointed in the right direction?

The ECB followed the Federal Reserve this week in reaching one trillion euros in additional liquidity added to the Eurozone economy via bond purchases.

However, with other developed nations aiming direct support where it is most needed and struggling with the lifting of lockdown measures, there is a question as to whether this support for the financial markets is a real benefit to getting the economy of the region back on track.

Despite activity having seemingly bottomed out according to data released so far this month, concerns over the pace of the recovery remain. This is in part due to the difficulties still being faced by the EU Commission in gaining agreement to how the recovery plan will be funded and distributed.

With estimates continuing to predict that the Eurozone will take three years to recover to pre-pandemic levels, fears over a second spike and the differing rates at which the various economies will open up display a lack of clear leadership and direction.

The weakness of the economy even before the pandemic hit, although hidden by the downturn since March, will still be there when support starts to be gradually withdrawn. It may become obvious that activity may not be able to grow at all without significant support. That will call into question the systemic failings of the Union and drive the debate over whether to press on with a more Federal system or revert back towards a looser trade driven group.

Yesterday, the euro started to lose ground versus the dollar. It fell to a low of 1.1288, closing at 1.1298