Last week was not an easy one for anybody. Financially speaking, it was tough across the board too, with US and UK equities falling by 16% and 12%. Sterling had a dire week, with losses of six and a half US cents and two and a quarter euro cents, yet was eventually almost unchanged on average against the other major currencies.
After two weeks of relentless downward pressure the pound rebounded on Friday to become the day’s strongest performer. Its recovery was probably not because of the unexpected net repayment of £394 million of public sector borrowing in February. More likely it was the result of the government’s decision to cover 80% of the wages of workers who would otherwise be laid off. The scale of the scheme will dwarf February’s modest repayment. According to the Institute for Fiscal Studies, it will cost billions of pounds every month.
The Brexit process made a brief reappearance on the front pages at the end of the week when it turned out that the chief negotiators on both sides had been hit by Covid-19. Michel Barnier tested positive for the virus and his whole team went into isolation. David Frost, his UK opposite number, went into self-isolation after showing symptoms. The possibility of a no-deal Brexit remains real.
Krone smacked again
For the third day out of four the Norwegian krone took last place, losing an average of 4% to the majors. It is down by 9% on the week to sterling as a result of a 27% decline in oil prices and a 75-basis-point rate cut by Norges Bank.
Once again the caveat is that the krone’s biggest handicap is a lack of liquidity. Trading volumes that would hardly budge the pound or the euro have a disproportionately large effect on the NOK. That is not to suggest that liquidity is in abundance elsewhere. Panic buying of US dollars has had an effect across the board, forcing the Federal Reserve to ramp up its swap facilities with other central banks.
Another threat, also on a broad front, is a lack of growth. A month ago it was grudgingly conceded that Germany might go into recession. Today the debate revolves around whether the world is heading for recession or depression. One commentator describes it as an ice age. Investment bank Morgan Stanley estimates that the US economy will shrink by 30% in the second quarter. St Louis Fed President James Bullard is one of many who object to the use of the word “recession”. He argues “that a potential $2.5 trillion hit coming to the economy is both necessary and manageable… an investment in public health that lays the groundwork for a rapid rebound”.
Tonight brings the first of the provisional purchasing managers’ index readings for March. They are not expected to look pretty and the ones that follow them in a month’s time will most likely be even less so.
The first to appear will come from Australia and Japan. Readings in the growth zone above 50 are unlikely. Other data today cover Canadian wholesale sales, Euroland consumer confidence and the Chicago Fed’s national activity index.
For sterling, the focus will once again be on the government’s financial support mechanism. It is under pressure to support self-employed and gig workers in the same way it is helping employees. Something may be forthcoming today.