Good Morning,

After a quiet close to the week because of the Independence Day holiday, it’s been China that has raced out of the blocks this morning. The Shanghai Composite index is up over 4% this morning as investors give a nod to how well the authorities have handled the mini virus outbreaks, allowing things to carry on pretty much business as usual outside of the hotspots, which will bode well come earnings season. China’s economy is still set to expand this year, with forecasts being raised to 1.2%. That level of growth would be welcomed by any European country during the good times, but for China that’s some 5% lower than they were otherwise expecting.

A Report in the Wall Street Journal this morning says that the country is likely to fall well short of its pledge to buy $25bn of US energy this year, with les than 10% of that amount bought to date. China, like most of the rest of the world, will be working through its stockpiles of fuel that built up over the lockdown and could, if they wanted to, comfortably make up the shortfall over the second half of the year, it’s just whether they want to!
There’s a great article in Al Jazeera talking about their hydro-electric dams, where two of them working at full capacity produce as much electricity as every power station in the Philippines combined! China are moving away from large scale hydro now that they’ve picked off the easiest sites for these massive projects and looking at either more localised projects with smaller outputs or alternatives like solar. The problem the rest of the world has is that the cheapest source of energy for them is coal, which fuels around 60% of their energy generation and is responsible for about 80% of their emissions.

The FT is reporting that Boris Johnson is likely to announce a phasing out of Huawei technology in the UK’s 5G network. A combination of US sanctions on the company and growing distrust over state backed enterprise means that the UK will have to look elsewhere. Even if the UK was previously comfortable using Huawei, since the US put sanctions on the company and anyone supplying them it has meant that the supply chain has now shifted and not everyone in it can be successfully vetted and approved by UK security services. The debate now will be whether we strip out existing Huawei kit and the 5G rollout takes much longer, or if we take a phased approach over the decade to reduce disruption – either scenario means delays to the whole of the country having coverage though and is likely to mean we get leapfrogged by other countries in the race to get every single product in your life, on line.

Staying in the UK: Rishi Sunak is apparently mulling plans to issue £500 vouchers to be spent in ailing industries. The vouchers would be given to pretty much everyone in the country and would hopefully give these industries – such as travel and high street retail – some turnover and potentially a much needed dose of confidence for the consumer, which would then further encourage spending. The chancellor will be speaking on Wednesday this week and we’ll get some details on the furlough wind down, possible tax cuts (VAT, business rats and national insurance are all up for debate) and also an employer incentive scheme to hire under 25’s, as it is felt the young will be disproportionately hit by the fallout.

In Europe: France have said that their economy is tentatively bouncing back faster than expected. Their central bank is hoping that the date due out this week affirms that the pace of recovery in June beat their own and most analysts expectations.
Emmanuel Macron has had a cabinet reshuffle that he’ll announce today. He’s hoping he can get a stronger grip on the way the government works and on Friday he sacked prime minister Edouard Philippe and replaced him with Jean Castex. Mr Castex is a senior civil servant who is well regarded within government but virtually unknown to the general public. The thinking is that he is now a puppet for Mr Macron who will effectively fulfil both the presidency and PM, by proxy.

Christine Lagarde has said that she expects disinflation pressures for a couple of years ahead, followed by an upward trend in pricing. Disinflation is probably manageable with the same loose monetary policy and negative rates the ECB have already got going on and might actually be a good thing in the short term. However this then becomes a fine line separating this from deflation, which would be really hard to break out of and might call for even more unorthodox monetary policy gambles to try and stave off.

Speaking of monetary policy gambles: Andrew bailey has written to lenders, possibly pre-empting the BoE turning negative. He’s warning them of the significant operational changes that would be required to systems and practices to accommodate interest rates moving below zero. In reality, many will be ready for the changes, as most banks with a European presence have experience. Though numerous smaller businesses will struggle with overhauling their systems to cope – case in point; when oil turned negative, some of the most sophisticated futures trading platforms couldn’t handle the move, which ended up costing investors and institutions hundreds of millions of dollars.

The week ahead looks set to be fairly busy, with a decent run of data from all corners of the globe and Rishi Sunak, on Wednesday, setting the tone for the UK economy for the months to come.  Today’s UK construction data and European retail sales will all be closely scrutinised – the latter is a good bellwether for the UK, as we opened up 2-3 weeks later than Europe and therefore get an idea of what we might expect from the UK consumer going forward.

Be well.


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