Good Morning,

The Yo-Yo effect continues, with investors concerned about a second wave of the virus, but seemingly equally concerned that they might miss out if things don’t turn out too bad. It took the US session to get things moving in the right direction and overnight things took off like a rocket, with the Nikkei up almost 5%! This is a bit anomalous versus other Asian bourses, as much like the FTSE with Sterling, the index benefits from a weaker currency, as it makes the relative values of the global businesses listed on the exchange more valuable when translated back to Yen. Still a good day to be long equities, a bad day to think you’ve got your head around effective risk management!

Speaking of risk management; UK PLC’s first day back at the shops was a mixed bag of success, with plenty of people making the effort to keep distanced, but a few unable to contain their excitement at being able to spend in a shop rather than online. High Street footfall was up 50% compared to last week (no surprise) but analysts will be keen to see how the real time data progresses in the coming days, once the freedom effect wears off and people become more used to being back to some sort of normal.

A boost for the US markets yesterday came from the Federal Reserve, who have said they’ll now be buying corporate bonds directly, as part of their asset purchase programme. Previously the Fed were only purchasing by investing in ETF’s, but by taking a direct approach they can run an ‘active portfolio’ and start supporting specific sectors or businesses that they deem worthy – though there is an investment criteria that means they may not be able to save everyone.
The critic in me wants to point out that by purchasing bonds, they’re supressing yields and giving investors A, a false sense of reality and B, little other option that to invest in the equity market, which risks again becoming over-inflated. This means that unwinding their actions in the corporate bond market down the line may be as troublesome as when they once tried to dial in quantitative easing and the market threw the toys out of the pram, which was affectionately dubbed the ‘taper tantrum’.

Staying in the US: Trump is set to announce some police reforms in the shape of an executive order, later today. The reforms apparently fall short of protestors demands and focuses around throwing money at the problem, to improve training, rather than dealing with the main issue, which is one of accountability and the lack thereof for police. The Washington Post has the story.

Trump’s also announced that he’s going to cut down the number of US troops stationed in Germany by almost a third. He’s spoken about this before and calls Germany “delinquent” in its contributions to Nato. He might have a point on this one, as the US contributes almost a quarter of the entire Nato budget and one way to balance this out if other countries aren’t willing to spend more is for the US to spend less. It doesn’t necessarily suit the US for other countries to spend less though, as they have the world’s largest arms export industry.

One thing from the US hasn’t created controversy is in the Commerce Department’s announcement that they’ll allow companies to work with Huawei to create a ‘5G standard’. The move still doesn’t lift any of the restrictions on the utilisation of Huawei products, but it does mean that there will be a uniform approach to the technology and that we won’t get a 21st century version of the VHS / Betamax debate.

Back to the UK: Boris has said there’s no reason a deal can’t be reached with the EU by the end of next month. The PM has urged negotiators to “put a tiger in the tank” – a quick google of the slogan reveals it came from Esso to shift petrol and not Kellogg’s to shift cereal; either way it’s Grrrreeaat  –  and he’s complimented European leaders and the European Commission for their agreement to push things along. Sterling caught a bit of a bid on this as the day wore on, but is still being closely matched by the Euro gaining ground on the Dollar, so the cross remains fairly constant.

This morning we’ve already seen UK unemployment numbers, which were an interesting read because the headline rate remained unchanged between February and April at 3.9%. Payrolls at companies did fall by more than 600,000 though and vacant positions also dropped at a record pace. The data speaks volumes about how quick the Chancellor was to react to the situation through the furlough scheme and though it is unlikely that these numbers will hold as the months roll on, at least it’s not been the same as the scenes in the US where unemployment more than tripled overnight.

Data for the rest of the day includes US retail sales, industrial production and housing data. The UK DMO will be making a series of debt issues and the take up will be seen as key, ahead of the Bank of England’s meeting on Thursday of this week. We might also get some more details on the US’ next round of stimulus – not only quantum, but perhaps where it will be spent, this could take the shape of an infrastructure bill, independent of Covid relief funding.

Be well


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