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Further deterioration

Social distancing

Monday was a day of video conferences, statements and new rules to prevent the spread of Covid-19, some of which were more concrete than others. In financial markets, it was equities that took the biggest hit. In the FX world, the Canadian and Australian dollars came off worst while the euro led the safe-havens.

The Eurogroup of EU finance ministers met at a social distance, making the traditional pledge to “do whatever it takes and more to restore confidence and support a rapid recovery”. The six-hour meeting did not result in any bold steps. There was discussion about tapping the European Stability Mechanism’s €410 billion firefighting fund but to do so in a major way would require ratification by national parliaments.

The leaders of G7 slightly tweaked the language of commitment, saying they would do “whatever is necessary” to ensure a strong global response and asking their finance ministers to coordinate on a weekly basis. A former economic advisor in the GW Bush administration said “If the terms of this G7 statement are actually fully implemented, it should diminish market uncertainty”. If.

 

National distancing

A growing number of countries are restricting or blocking entry to foreigners. The President of the European Commission is the latest to head down that route with a 30-day ban that will require approval by national governments. The situation is particularly damaging to aircraft manufacturers, airlines and the tourist sector.

Double-digit falls in airline shares were the order of the day and Boeing continued its slide to a level 63% below September’s high. Whilst air travel is by no means the only sector hit by Covid-19, it is an example of how one economic stoppage can cascade across vast swathes of the economy. A city centre sandwich shop can go to the wall if the big employer upstairs tells its staff to work from home.

Sterling finds itself under increasing downward pressure as it becomes clear that Britain now faces two economic shocks simultaneously: the tragic Covid-19 pandemic and the increased chance of a no-deal Brexit at the end of the year. It lost an average of 0.7% on Monday, coming within a couple of cents of all-time lows against the Swiss franc and the US dollar.

 

More cuts anyone?

Although no central bank announcements or budgets are scheduled for today, one cannot dismiss the possibility of either. There is talk of a new stimulus package from the chancellor of the exchequer today or tomorrow.

The UK employment data are theoretically important to sterling this morning. Analysts expect the rate of unemployment for January to be unchanged at 3.8%, with basic earnings growth steady at 3.2% a year. Given what has taken place in the two months since January, the numbers would have to be outrageous to change investors’ minds about the pound.

A more up-to-date indicator will be ZEW’s surveys of German and euro zone economic sentiment, carried out this month. The readings certain to be lower than last month’s 10.4 and 8.7, the only question is how negative they will be.

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