SME market key to recovery

Boris Johnson could be pardoned for being in a state of confusion over his latest decision over the Covid-19 Pandemic.

Fresh from having been criticised for being slow in putting the country into lockdown, he is now being criticised from all sides for having put quarantine in place for travellers returning from anywhere in Spain.

The Spanish Prime Minister has been highly critical of the decision despite Germany and a few other EU members also expressing concern over a second spike.

While several of the Government’s schemes have clearly been headline grabbing like the stamp duty holiday for property purchases up to £500k and the half-price meal deal which starts this weekend, an in depth survey of the economy has shown that it is the SME sector that is going to be the most significant driver of the economy.

Forced to furlough a large proportion of the workforce, it is the less heralded firms that make up the supply chain that will make the difference. That is where employment will be most critical particularly should the second spike across Europe see travel be significantly affected.

This optimism has been the primary driver of yesterday’s rally for the pound even if it does now look exhaustive.

As the dollar index starts to look severely oversold, it will take a mammoth effort to now see the pound significantly above 1.30 versus the greenback despite yesterday’s high of 1.2952. It closed at 1.2941 and while it is unlikely no one would be surprised if it did indeed test resistance at 1.2975.

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Dollar finding its floor

Jerome Powell, the Fed Chairman is not an especially easy man to predict, and he takes no pleasure in surprising markets as several of his predecessors have done.

Now is clearly not the time to be playing games with investors and traders so it is a daily good chance that the Fed will add further stimulus to the U.S. economy when its meeting concludes later today.

Powell is also not a man who finds explaining his reasoning to the media difficult, since being a lawyer he is used to using simple terms to explain his reasoning.

So later today, it is fairly certain that the Fed will confirm that not only will rates remain close to zero, but they will stay that way for slime time to come. There will also be further liquidity provided to the market irrespective of the decision over employment benefit that is yet to be announced,

The latest rumour is that the Republican members of Congress are proposing that the initial $600 per week payment is now reduced to $200 per week. That, in itself, is down from a rumoured $300 yesterday. Democrat members have labelled this insufficient while Republicans apparently call it an incentive for recipients to look for work.

The dollar index has been weakening for some time, while the reasons for this have been moulded to suit the situation, it is now close to reaching equilibrium with other G7 currencies. While that may not necessarily mean either a rebound or a slowing of the fall, it may mean that we are closing in on a bottom.

Yesterday, the index reached a low of 93.49 before climbing back to reach 94.00 before closing at 93.69.

Unequal employment benefits to hit nations differently

The excitement of the agreement of a Pandemic Relief fund is now being overshadowed by a second spike emerging in several regions. While Italy, the original hot spot, has so far been spared, Spain which was a close second to Italy in most charts of infections on the mainland is seeing Catalonia becoming the epicentre.

The sense of urgency that prevailed when the pandemic first started, has been replaced by a sense of hope that it may not be as bad this time around.

While the Spanish Prime Minister has attacked the UK’s decision to quarantine holidaymakers returning from Spain, his own capital is insisting on facemasks and lowering the numbers who can gather, inside or out.

Other nations are reviewing their plans for lifting their lockdowns, some have reversed decisions while others are delaying certain reopening’s.

There is a sense that there has been too much certainty about defeating a second spike at its origin and this week’s confidence and activity data may be hit by fears among those either looking for work and those returning from furlough.

The ECB remains concerned over the state of the banking sector across the whole region. It has instructed banks to not pay any dividends until next January at the earliest. While this will afford banks the opportunity to replenish capital it will depress their stock prices further.

The lack of a Federal style agreement over various union-wide benefits means that the recovery from the Pandemic will be patchy and uneven. This may lead to a discussion over a more integrated Union but that will see many different side issues included that will see any discussion drag on and most likely be kicked down the road

The euro began to run out of steam yesterday. It reached a high of 1.1773, its highest level since September 2018 but fell back to finish lower on the day at 1.1720.