Sunak looking at his future dilemma

The realization, despite previous warnings, of a severely damaging recession has finally hit home pushing Sterling to its lowest level since early April.

An economy which is completely dominated by the services sector is bound to suffer a longer and more painful slowdown as that is the area that will be most delayed in reopening and suffer from the most severe cash flow issues.

Predictions of a 30% contraction in Q2 could be seen as optimistic if the 4th July target for restaurants, bars etc. to reopen is missed.

There is still a degree of confusion over just what the new regulations mean. Where can we go? Who Can we see? These are two of the more common questions. While no one can expect to be given a personalized guide to what they are or allowed to do and a degree of common sense is required, there is still mass confusion either real or feigned.

There is clearly a clash coming between the Government and the Unions as the Trades Union Congress sees a chance to re-establish itself. Transport and education have been the first areas targeted, but any attempt by the Government to freeze public sector pay could see the uneasy truce collapse.

The Chancellor, Rishi Sunak, has only been in the job a few months and has only experienced giveaways. It started with an expansionary budget which quickly became moot and has been followed by several schemes aimed at business, the self-employed and workers to help them avoid any form of meltdown.

However, Sunak now has to start to consider how he is going to pay for his generosity. One article recently commented that all Sunak has done is finally used public money to help the public. Of course, that fails to recognise the unprecedented level of borrowing the Government is going to have to undertake.

In order to service that debt, there will be some difficult decisions; will they result in a cut to public spending, leading to cuts in public services or an increase in taxation? A traditional Conservative Chancellor would see cuts to public spending as a no-brainer, but it remains to be seen if there is a third way, where there is some form of compromise.

As previously mentioned, Sterling fell to a six-week low versus the dollar yesterday. It reached a low of 1.2165, closing at 1.2226.

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New jobless claims remain close to three million

The dollar index rallied yesterday as President Trump declared himself a fan of a stronger dollar. That may help in lowering the cost of imports and the trade deficit, but it will do nothing for exports.

Trump’s theory on exports seems to revolve around quotas and forcing countries, one way or another, to buy U.S. goods and competitive pricing is rarely needed.

The climb in the dollar’s value was also both a hangover from Wednesday’s comments from Fed Chairman Jerome Powell and further clarification yesterday where he appeared to rule out the possibility of negative interest rates.

One bombshell yet to hit the U.S. is pent up supply in the housing market that could knock millions off family’s net worth at just about the worst possible time.

In the 2008/9 crisis, the collapse of housing took a few years to reach its bottom, but this may see a more instant reaction.

Spring is usually the start of a surge in families moving but just as much as no seller wants potentially infected viewers, the effect of the virus is also hampering those interested in buying. Add to this a tightening of lending standards and an estimate that 15% of mortgages will fall into arrears and we could be looking at a bubble that is about to burst.

Weekly jobless claims were released yesterday, and new claims remain around three million. Continuing claims are currently at 22.8 million. While this is generally the expected position for where the U.S. is in terms of Covid-19, questions are being asked as to when a substantial fall will take place.

The dollar index rose to a high of 100.56 yesterday and closed at 100.30. Factor in the issues facing the main contributors to the index and the market is looking fairly optimistically towards 100.80.

If you can’t beat ‘em, don’t ignore ‘em

The recent ruling by the German Constitutional Court is being labelled in several different ways and having several rationales attached to it. Untimely is the kindest epithet I have seen, while convenient is a more generally used term.

Can anyone really think that Germany would rely on its Court system to dig it out from under the pressure that it is getting from those States most affected by the Cov-19 crisis?

To be able to say sorry we would love to provide more aid, but we simply are not allowed, is certainly convenient. Whether it is anything more sinister we may never know.

However, were that to be the case, it would certainly be the end of the Eurozone as the steps towards a more Federal Union could never happen, while the current status quo is already creaking from the successive crises that appear to have affected it far more than most other nations. Throw in Brexit and you have close to a perfect storm.

The EU Commission and EU Council would do well not to use their most prized tactic; heads firmly in the sand, as while it may move slowly this behemoth continues moving.

The euro is gradually slipping towards significant support as it suffers at both the hands of the dollar and its inability to agree on a degree of cooperation to fund the effects of the pandemic.

Yesterday, it fell to a low of 1.0774, closing at 1.0804.