Brexit hitting firms below the surface

Bank of England Chief Economist spoke yesterday of his opinion that the UK economy will recover at a rate of knots. The shock to the economy of the first lockdown was far more damaging than the second wave since the Government already had support packages in place and business knew to a certain extent what to expect.

Comparing this human disaster to the 2008/9 financial crisis, Haldane went on to say that although the loss of human life is tragic, the structure of investment and financing remains intact, so it is far easier to recover economically.

Haldane has consistently been the most optimistic Bank of England Official as his fellow MPC members barrel with the idea of negative interest rates as a way of boosting the economy going forward.

There is a concern over the effect on banks of such a move. Their profits would be hit which would probably be welcomed by the general public, but this would have a knock-on effect on their capital base which would, in turn, curtain lending.

The MPC jury is still out on such a move with an update expected at the next meeting of the MP which takes place on February 4th.

The UK saw its largest single daily death toll of the entire Pandemic yesterday. This is despite the number of new infections falling at what appears to be a dramatic rate. Hospital admissions and fatalities will always lag behind infection rates as the virus takes between a week and ten days to develop sufficiently for the patient to require hospitalization.

The data for infections confirms that the peak of the second wave is close. The Government has stressed the importance of remaining vigilant and complying with all the guidelines.

In an odd manner, the issues created by the Pandemic have masked the public’s view of the underlying issues created by Brexit for small and medium sized businesses. While on the surface the transition appears to be going smoothly, with no news being good news, a report yesterday suggests that up to 20% of such businesses have season trading with the EU due to documentary difficulties. That is an issue the Government will need to get on top of if the economy is going to recover at the rate suggested by Andrew Haldane.

Yesterday, the pound climbed to a high of 1.3636 versus the dollar but any recovery from recent falls looks fragile. A break of 1.3720 with a close above that level is needed to the rally to continue from a technical perspective. It closed at 1.3634.

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Yellen starts as she means to carry on

Today, the U.S is set to wake up from what many will consider to be a four-year bad dream.

Joe Biden who won a fair and proper Presidential Election last November will be sworn in as President and the period of recovery will begin. Just as expectations grow that the support package Biden is proposing will accelerate any recovery, so will the pace of change engendered by his Presidency will tear away a divisive and combative Presidency.

In his final speech as President, Trump said that he leaves with his head held high having achieved what he came to do. The Senate trial following Trump’s impeachment appears moot now, but it may still go ahead. A two thirds majority will be needed for that to succeed which appears doable since the Democrats control the Senate.

However, there is a plan being considered to abandon a full trial and to go ahead with a simple motion that disbars Trump from running for office again. A simple majority is all that would be needed for such a Bill to pass.

Today is being heralded in several quarters as the day the recovery from both Covid-19 and an Administration that has used the highest office for personal gratification begins.

Janet Yellen, Biden’s pick as Treasury Secretary, brought a huge amount of experience to her Senate confirmation hearing yesterday and it was needed.

Members of the committee questioned the new President’s support and stimulus plans and Yellen was almost strident in her support for what is proposed.

She was told that this is not the time for a laundry list of Liberal reforms. Yellen countered that the country needs to go big in its reforms no matter the effect on the national debt.

She put down a clear marker that a Democrat Administration intends to provide deeds over words to battle the spread of Coronavirus as deaths from the virus passed 400k.

The dollar index paused in its recent recovery yesterday as positions were squared before today’s events. It fell to a low of 90.40, closing at 90.48, remaining well above support at 90.20 and 90.00.

Bank bailouts to become a real possibility

This week’s ECB meeting has been overshadowed in market terms by the inauguration of President Biden. When the ECB meeting concludes tomorrow, the market’s view is that it is likely to be underwhelmed by further procrastination.

ECB President Christine Lagarde remains hamstrung in her ambition to be a bold and decisive leader.

In a role where she is becoming more and more of simply a figurehead required to deliver the timid and safe decisions of 27 individual Central Bank Governors, Presidents, and Chairmen.

The majority see the ECB through a lens of their own national needs and requirements. Lagarde needs help from the EU Commission if she is to lead a recovery which is looking less and less likely.

The economy is looking likely to fall into not only a recession this quarter, but a contraction which could last for the next two, possibly three quarters.

As was mentioned yesterday, banks are already going on the defensive in their lending policies. That will severely hamper good borrowers recovery while bad loans are set to grow exponentially.

The ECB has bent over backwards in its attempts to provide banks with the ability to defer bad loan provisions and has been premature in allowing banks to pay dividends rather than repair their balance sheets.

Lagarde was left with a no-win situation over that issue. Either she agreed that banks could pay dividends and support their share prices, increasing tier one capital or they provide for what are now historic bad loans which would improve their balance sheets but impair new lending.

Tomorrow the ECB Governing Council is likely to cluck cluck like a flock of hens, but take no further action, using the timeworn expression that they will wait and see what happens as vaccine deliveries speed up allowing lockdowns to be withdrawn.

The euro reacted to the fall in the dollar yesterday by rising to a high of 1.2144, closing at 1.2127.