Friday 17 April 2020 4:40 pmMoneycorp Talk

Pessimism & reluctance

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Head of UK Origination at moneycorp

A moment of nostalgia for sterling and relief for the euro.

Sterling was not unduly worried this week, having a surprisingly successful week. Over the eight-day week it strengthened by an average of 0.5%, losing out only to the puzzlingly mismatched Australian dollar and Japanese yen. It added one euro cent and one and one eighth US cents, a 0.9% gain in both cases.

PM Boris Johnson left hospital and retreated to Chequers, his country residence, to fully recover. Foreign Secretary Dominic Raab is still de facto leader, and announced a three week extension to the lockdown. Five key criteria’s must be met before the UK will lift the lockdown, and those seem quite far off, for now. Economic news this week was bleak to the say the least, but investors didn’t seem too unperturbed, probably because the rest of the world is in the same boat. 

The Office for Budgetary Responsibility (OBR) sees the UK economy shrinking by 13% in 2020. The OBR report features estimates from a handful of other forecasters, with quarter-on-quarter growth in Q2 ranging from the OBR’s -35% to KPMG’s best case scenario of -2.1%. A high amount of guesswork is needed to make the prediction, for example how long the UK is in lockdown, the bigger the economic hit.

Other data of note includes the British Retail Consortium report which stated that March brought, “the worst decline in retail sales on record.” Many jobs are at risk within hospitality and retail, as well as their supply chains. Despite the gloom, sterling was roughly steady against the euro.

In the three months to February UK imports fell £10.1 billion, with exports down £3.5 billion, creating £1.4 billion trade surplus. While the figures were better than expected, the relevance of the data (being from February), is minimal.

After much haggling, EU finance ministers compromised and managed to reach an agreement on financial support. The €500 billion relief package is for European countries hit hardest by the tragic Covid-19 pandemic, such as Italy and Spain. The plan involves tapping the European Stability Mechanism for about half the amount, the balance coming from the European Investment Bank and the European Commission. In some quarters there is disappointment that the Netherlands and others remain resistant to the notion of shared debt but at least they managed to get something off the blocks. The euro weakened by an average of 0.3% over the long weekend, giving up four fifths of a cent to sterling.

President of the European Commission Ursula von der Leyen offered on behalf of the EU a heartfelt apology to Italy for “letting it down” at the start of the coronavirus. No EU country responded to Italy’s initial call for aid via the bloc’s emergency mechanism. Fresh evidence emerging has suggested that few European countries have actually achieved any herd immunity, as some begin to remove lockdown measures, albeit it cautiously and slowly. 

Economic statistics from the euro zone was wholly forgettable, but dreary. The International Monetary Fund sees annual contractions of 7.5% in Euroland and 7% in Germany. German inflation slowed from 1.7% to 1.4%, as expected. Euroland industrial production declined by 0.1% in February and was down by 1.9% from the same month last year. The euro was equally dull, holding steady against the US dollar and losing a cent to sterling.

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