Daily Brief

EU to consider recovery fund

Bad day, good day

Perhaps it ought not to come as a surprise when a currency flip-flops between poll position and tail-end Charlie. Especially if it is sterling, and particularly in today’s frenetic market conditions. That was the case on Wednesday. Although the pound did not actually make first place it was only a millimetre behind the Canadian dollar.

For no obvious reason the pound began to move higher shortly after the ONS published the inflation data for March. As noted yesterday morning the numbers were unremarkable, with the headline rate lower on the month at 1.5%. They had no conceivable link with sterling’s rally. It went up simply because there were more buyers than sellers, adding an average of 0.5% on the day and picking up half a US cent.

The poor old Norwegian krone picked up only the wooden spoon, as oil prices failed to make appreciable headway. Clustered fairly tightly together the euro, Swiss franc and Japanese yen all lost around 0.7% to sterling and were narrowly ahead of the US dollar.


Junk is OK

Following carefully in the steps of the US Federal Reserve, the European Central Bank said it would loosen its criteria for collateral posted against loans to commercial banks. It will accept non-investment-grade paper, colloquially known as “junk”.

The purpose of the change is to anticipate that many currently solid issues will be downgraded as a result of the tragic Covid-19 pandemic. Without a change to the criteria the central bank would be less able to provide monetary stimulus. The ECB has not yet said it will go the whole hog and buy junk bonds as part of its quantitative easing asset purchase programme but the possibility will surely come up for discussion at next week’s Governing Council meeting. The euro is seven eighths of a cent lower on the day.

On the statistical agenda there was nothing of any great significance on Wednesday. Canadian inflation slowed by much more than expected from 2.2% to 0.9%, the biggest ever monthly decline, driven mainly by lower energy prices. Canada’s new housing price index was 0.9% higher on the year in March, apparently unaffected by the pandemic. South of the border the US house price index for the previous month was up by a rather more impressive 5.7% on the year. In Europe the EC’s consumer confidence measure “plummeted” in April, as did the employment expectations indicator.


European Council

The European Council meets today on video conference. A key topic will be the EU’s coordinated recovery fund, and how it will be financed. Until now, national leaders have been unable to find a compromise on jointly-issued “corona bonds”. Continued failure to reach an agreement could prejudice the survival of the union.

EC president Ursula von der Leyen says the EU will need to find €1 trillion to fight the pandemic but nobody wants to put their hand in their pocket. One suggestion is to raise the money by selling perpetual bonds, which never mature and therefore cannot be reneged upon by spendthrift governments.

Elsewhere, investors’ eyes will be on the provisional purchasing managers’ indices for April and US weekly jobless claims which will be in the millions. Friday brings UK retail sales and US durable goods orders for March, the same goes for the finalised Michigan measure of consumer confidence. 

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