News & analysis


Sterling is trading broadly flat this morning, amid the release of gross domestic product data for the month of June and preliminary data for the second quarter. GDP fell 20.4% in the second quarter, with the falls being concentrated in the beginning on the quarter and activity actually picking up in June. This contraction was larger than any other major European economy, and roughly double the contraction experienced in the United States. Today’s GDP release confirms the UK experienced a historically bad economic contraction in the second quarter. However, comparisons to previous recessions are not particularly illuminating. Firstly, the 20.4% contraction in Q2 was caused by active shuttering of the economy which has since been reversed – hence we are likely to see a faster recovery of much of that activity than in, say, 2009. The 8.7% monthly jump reported in June supports this. Secondly, the Government’s furlough scheme has greatly delayed the labour market shock you’d associate with a recession of this magnitude, in the hopes of lessening long-term impacts on consumer behaviour due to job losses. The big questions about the UK economy are about the future, not the past, and remain unanswered. Most notably, of the more than 7 million workers inactive or furloughed at present, how many will become unemployed and how many will return to work? Those that are made jobless will presumably change their spending behaviour – will this undermine the growth in consumer spending and the housing market that has recently encouraged the Bank of England?


The euro is trading on the back foot against the dollar this morning as the US fiscal impasse triggered a boost in US bond yields, ahead of US inflation figures. Eurozone industrial output figures are also awaited while virus headlines from the eurozone weigh on the currency as well. Germany’s Health Minister Jens Spahn stated yesterday that “we must be very alert about the rise in coronavirus infections”, after Germany reported smaller and larger outbreaks throughout the entire country. His comments come after he stated last week that a lockdown could be reimposed if daily infections continue to rise. In the Netherlands, the daily increase in virus cases is back at levels last seen in April, the worst month in terms of new cases so far. Spain and Belgium have also been reporting increased numbers, heightening fears of renewed localised lockdowns. Apart from this morning’s industrial data at 10:00BST, the data calendar for the eurozone is blank today.


With no clear course, the dollar continued to trade mixed in the G10 space yesterday and this morning. Measured by the DXY index, the dollar has made marginal gains over the last two days, but this is predominantly due to weakness in the Japanese yen and doesn’t fully describe the manner in which the greenback has been trading. News on the domestic outbreak yesterday saw Florida and Georgia record jumps in Covid-19 fatalities, while the overall rise in daily infections in the US slowed to 0.9%. Regarding fiscal policy, Trump’s plan to bypass Congress and extend federal unemployment benefits by executive order is unclear whether it will work in practice. Announced on Saturday, the executive order extends the unemployment benefits by $400 a week, however, under the new scheme it requires states to provide $100, many of which cannot afford. Although states can make applications for the federal government to provide all or part of the $400 payments, it is unclear how the policy will play out in practice. On top of that, discussions of a capital tax cut and middle-income tax cut are ongoing as potential avenues for additional stimulus. As for the presidential elections, Joe Biden picked Senator Kamala Harris to be his running mate. Harris is the first Black woman and first Asian-American on a major party presidential ticket, and her push for police reform could help bolster Biden’s popularity on law and order.


The loonie rallied again yesterday to mark two consecutive days of gains against the US dollar. Improved risk sentiment was the main drive behind yesterday’s rally and came from a combination of a capital gains tax cut/ middle-income tax cut in the US and news that Russia will conduct phase III trials of what seems to be an effective vaccine. Oil prices held steady below $42 per barrel, bucking the trend in precious metals which were in free fall. Spot gold prices fell 4.38% and continue to decline this morning. In politics, speculation was rife that Finance Minister Bill Morneau was out of the door following a report in the Globe and Mail that the minister was at loggerheads with President Trudeau over the best way to reignite the Canadian economy. This added to the speculation that Morneau would be removed from his position after it was exposed that a charity had received a government contract where his daughter works, while the charity had paid C$41,000 in travel expenses for his family for trips to Kenya and Ecuador. However, yesterday PM Trudeau expressed “full confidence” in Bill Morneau during a rare public endorsement, which helped ease some of the risk around the loonie. The Finance Minister’s job is of special importance at present given the economic contraction induced by the pandemic, especially given that fiscal policy is playing a more active role in driving the recovery. Today, manufacturing sales data for June is released at 13:30BST, with existing home sales for July released shortly after at 14:00BST. This morning, the loonie is selling off against the dollar though despite higher oil prices helping the Norwegian krone, with broad USD strength being a dominant theme in G10 markets this morning.



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