European markets saw their second day of decent gains yesterday, helped by the prospect of more significant stimulus spending, after Germany signed off over €750bn of new spending, which included €156bn of new borrowing, with the prospect that the US was set to follow suit with its own $2trn stimulus plan.

With a broad agreement seemingly in sight, on cheques for American families, a bailout for airlines and other businesses, and an extension to unemployment benefit, US markets finished higher for the second day in succession, albeit off the highs of the day. This was due to an intervention from Bernie Sanders, over a Republican move to cap the level on unemployment payments, which threatened to delay the passing of the bill. As it turns out the bill was able to pass the Senate despite this disagreement, and now moves on to the House of Representatives, where it is likely to be rubber stamped tomorrow.  

This can’t come soon enough, given that this afternoon we will get to see the publication of the latest US weekly jobless claims numbers. These could well be extremely ugly and look likely to come in well above the 1 million mark. Yesterday Canadian Prime Minister Trudeau told the Ottawa parliament that 1m Canadians applied for jobless benefits last week.

If that is extrapolated out into the US economy the numbers could well be eye watering, with some estimates of up to 4m, up from last week’s 281k. Consensus expectations are for a number of about 1.6m, which might well be on the conservative side.

The prospect of further delays, along with some nervousness ahead of these US jobless numbers has seen Asia markets fall back sharply this morning and as such markets here in Europe are also expected to open lower, ahead of what is likely to be an extremely choppy day, as new cases of the virus continue to climb.  

The coronavirus crisis has thrown economic orthodoxy up in the air in the past few weeks, as investors fret about the effect on consumer confidence and unemployment, the economic disruption and lockdowns are likely to have on the UK, as well as the global economy.

On the basis of some of the recent economic data we are slowly starting to see the effects that the unfolding crisis is having on the UK economy, and it doesn’t make for positive reading, with applications for universal credit, up over half a million in the last nine days.

This morning’s retail sales data for February look set to offer an early sighter on how UK consumer spending was starting to be impacted by the headlines coming out of China, and the rest of Asia, along with the sharp escalation in cases in Italy towards the end of February. It’s also important to remember that the extensive flooding across the country may well have impacted the numbers.  

In January retail sales, including fuel, bounced back strongly after a weak end to 2019, with a gain of 0.9%, however this is unlikely to be repeated, with expectations of a rise of 0.2%.   

Today’s Bank of England meeting is unlikely to be like any other. This month’s two emergency rate cuts are unlikely to be followed by any more now we’re at 0.1%. We may see the central bank commit to further measures to help stabilise the economy, having seen the bank already announce another £200bn of purchases of government and corporate bonds, bringing the total to £645bn.

Despite this it is doubtful what else monetary policy can now do to deal with what is a health crisis, that in turn is now morphing into a big economic crisis. It’s now all about fiscal policy with the Bank of England helping to oil the wheels, and the actions of the government do appear to be helping soothe some fears.

The new Covid Corporate Financing Facility will also go some way to help ease short term cash flow issues for companies but it is no panacea. It also presupposes that the current crisis and lockdown doesn’t last much more than three months. If it does spill over into Q3 then the government as well as the central bank will need to come up with a lot more innovations when it comes to monetary as well as fiscal policy.

In comments made earlier this month new Governor Andrew Bailey suggested that other tools that would have been thought unthinkable as recently as the beginning of this year, might come under consideration, such as direct monetary financing, where the central bank directly funds government spending by printing money, Zimbabwe style. Mr Bailey may well face questions on how far he is prepared to go in the context of the independence of the central bank in this regard. 

EUR/USD – another higher low has seen the euro edge closer to the resistance at the 1.0930 area, with a break targeting the 1.1000 area. While below 1.1000 the risk remains for a return to the recent lows at 1.0635.

GBP/USD – hit a high of 1.1973 yesterday but we need to move above the 1.2000 level to stabilise, and diminish the downside risk. Finding support at higher levels after last week’s lows at 1.1410. While below 1.2000 the risk remains for a move through 1.1400 towards 1.1000.

EUR/GBP – another choppy day yesterday, with support at the 0.8980 area. While above this support level there is a risk of a retest of the recent highs at the 0.9500 level. To have confidence that we could see further losses we need to move back below 0.8980, to target 0.8820.

USD/JPY – continues to struggle near the 111.80 area and trend line resistance from the 2015 highs. This remains a key level given it also coincides with the highs last month. The 109.20/30 area now becomes a key support. A move through 112.00 targets the 114.00 area.

 

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