Daily Brief

Repair and prepare

Nothing to see here

During the late morning and early afternoon on Wednesday sterling beat a fairly hasty retreat, giving up around a cent and a half to the US dollar and euro. Curiously, the pound turned higher as the Prime Minister began his interview with Parliament’s Liaison Committee, even though the first topic was his relationship with his top advisor Dominic Cummings.

The recurrent message from the Prime Minster during the meeting was for the country to “move on” from the Dominic Cummings story. Outside of Britain it is perhaps fair to assume that investors share that sentiment, and could not care less about a quirky baby-sitting eye-test road trip and whether he did or didn’t break lockdown guidance. However, sterling is driven predominantly by London, not by New York or Tokyo. London traders are notoriously sceptical about the pound at the best of times and they find it difficult to see any upside in the current pantomime.

Apart from the brief bounce as the committee meeting got under way, sterling was on the back foot for most of the day. It lost ground to all but the Australian dollar, falling by an average of 0.5%. Its biggest loss was more than one euro cent, 1.0%.  The Aussie’s problem was a story that China intends to cut imports of Australian coal. In the opinion of a BMO analyst, “given current relations, Australian coal is definitely the initial target”.


Joint support

Ten days ago Germany and France proposed a €500 billion recovery fund to support EU countries hit by the tragic Covid-19 pandemic. After due consideration, and apparently considerable encouragement from President Ursula von der Leyen, the European Commission has come up with a plan 50% bigger than that.

The €750bn package would be part of the next long-term EU budget as long as it was able to secure the unanimous support of the EU’s 27 members. It would be financed by bond issues to be repaid through future EU budgets. Distribution would take the form of €500bn in grants and €250bn of loans. That mix is hoped to win the grudging support of the “frugal four” countries which instinctively oppose the exercise.

The upward effect of the EC proposal on the euro was offset to an extent by the downward pressure of an almost gloomy speech by ECB president Christine Lagarde. She expects the euro zone economy to shrink by between 8% and 12% this year, including the 3.8% contraction that took place in the first quarter. On balance, though, the euro was wanted, and took first place for the day with an average gain of 0.5%.


Not buying stuff

The next 36 hours bring a raft of statistics for wholesale, retail and capital spending. None of them is likely to look good: there will just be different degrees of despondency. Mercifully few of them will have anything to do with sterling.

So far this morning Spain has reported a 31.6% monthly fall in retail sales and inflation has slowed to -1%. Swedish retail sales come next, followed by the EC confidence measures and German inflation. US durable goods orders this afternoon could fall by 19% in April and pending home sales are estimated at -15%.

On Friday morning Nationwide prints its UK house price index for May, which could be anywhere in view of massively-reduced turnover. German retail sales are pencilled in at -12% for April. GDP data for Q1 today and tomorrow are forecast to show quarter-on-quarter growth of -1.2% for the United States, -5.8% for France, -0.6% for Sweden, -4.7% for Italy and -2.5% for Canada. Ouch.

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