Chinese trade dispute is not what UK needs

The UK got a glimpse of the shape of things to come yesterday as data was released that showed that the country shed close to 700k jobs in the three months to May.

With the spate of major retailers and High Street stores closing premises permanently and several large firms saying they won’t take up the Government’s job retention scheme, the situation can only get worse going forward.

This serves as a chilling reminder of just how serious the outlook is for the economy as unemployment benefit claims are set to soar while tax receipts plummet. Having already cut VAT from 20% to 5% in several areas of the retail sector, the Chancellor is facing having to deal with the fallout from three million unemployed even if there is no second wave of infections in the Autumn.

Overall, the data shows that the start of the recovery indicated by other data from May shows that any improvement in activity has had little or no effect on the labour market.

The UK’s row with China over its U-turn in the use of tech equipment supplied by Huawei rumbles on and could explode into a full-scale trade war at any time. The government was at pains yesterday to say that the decision to drop Huawei wasn’t a political decision.

That seems an argument that Boris Johnson cannot win, since if the decision wasn’t political, then what was it? The use of Chinese equipment had been cleared years ago, indicating satisfaction with its quality and effectiveness so the Government may be backing itself into a corner and Beijing is unlikely to relent.

Luckily, they have only used rhetoric so far but there is little doubt they will announce more practical retaliation in the coming weeks that could signal problems for several areas of the economy not least education and infrastructure development.

Yesterday the pound’s reaction to the employment data was fairly muted. It traded between 1.2624 and 1.2523 versus the dollar closing marginally lower on the day at 1.2553. The 1.25 level seems to be the point at which traders will abandon any hopes of a continuing rally for Sterling. A close below that level may see the recent rally come to a halt and the pound fall back to lows seen late last month.

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Q3 losses for banks to be worst ever

The Q2 earnings season is in full swing in the U.S. and while corporate figures have mostly been in line with what was expected there remains a concern over the bank’s earnings or lack thereof.

The biggest issue revolves around loan loss provisions. While an increase in provisions appears to be prudent acceptance of what is to come as banks put aside funds for a rainy day, the reality in fact is that far from providing for losses, the provisions have simply become the bank’s terminology for the estimate of how much they will lose in bad loans going forward.

The six biggest lenders have seen provisions jump by 43% compared to Q1. They were already at significantly high levels historically but a further $36 billion has been added in Q2.

It will be a surprise if the Q3 numbers don’t show an even greater addition to provisions as the Covid-19 pandemic continues to spread.

The brewing row between the scientific expert Anthony Fauci and President Trump goes on with Trump continuing to blame the science for the way in which the entire pandemic has been handled.

A recent survey showed that the country supports the way in which Fauci has reacted both to Trump’s hectoring as well as the practical manner he has dealt with issues as they arise.

Trump’s casting himself as the major force in reopening the economy appears to be backfiring on his re-election hopes. His traditional supporters continue to lap up his rhetoric in getting the economy reopened but those in the centre who believed in his more business driven methods at the last election are leaving in droves.

Joe Biden holds a strong lead in the campaign and the clock is now seriously ticking for Trump to recover. In fact, it will take something totally unforeseen for him to be able to make up ground.

While Biden’s election would lead to a more caring and domestically grounded Administration, economically, the costs in turning around many of Trump’s policies will add to the problems facing the Fed and Treasury.

The dollar continues to be driven in the short term by global risk appetite. Yesterday, the dollar index rose to a high of 96.40 and closed at 96.30.

ECB places relief ball in EU Leaders court

As was generally expected, the ECB halted its accommodation for the economy at its meeting yesterday following four straight months of additional quantitative easing.

ECB President Christine Lagarde pronounced that it was time for the Bank to take stock of where the economy is headed and what can be done in a more practical sense to add support.

With that one phrase she handed the pandemic relief ball back to the EU’s Heads of State who will meet today in a virtual summit. Given the comments that have gone before, most recently from Dutch PM Mark Rutte, a new approach will be needed if the Fugal four (or five, or even six) are to be persuaded into guaranteeing the performance of the most stricken states.

The ignore it and it may go away stance that is being taken by the EU Commission is unlikely to work as data for Q2 and so far in Q3 show the slowdown getting worse.

Activity and confidence levels are unlikely to improve by much, if at all, going forward while unemployment, the most visible effect of the pandemic, not just in the EU but globally, continues to rise.

Lagarde commented at her press briefing that there has been a significant but uneven recovery since bottoming out in April and this shows that the Covid-19 virus has a long tail both economically and physically.

The Governing Council still sees the balance of risks to be to the downside but has nonetheless hit the pause button and adopted a watching brief while the measures already taken feed through although it is clear that an agreement over a unified response would be the shot in the arm the economy desperately seeks.

The euro remains a factor of the dollar’s activity. Yesterday, it fell to a low of 1.1370 as the rarefied air in the 1.14’s proved to be too much for traders to take. It closed at 1.1383 although it is unlikely to fall significantly without a major boost to the dollar or a collapse of risk appetite.