Good Morning,

The UK market was flip-flopping for a while yesterday, but eventually flopped as the positivity around re-openings and Rishi Sunak’s spending plans were outweighed by wider global concerns that infection numbers were back on the rise. It’s perhaps a little unfair to paint everyone with the same brush though, as Germany seem to have got a great handle on things and have managed to bring their case numbers down over the last few days and that’s even after posting retail sales numbers in June that were higher than they were in June of the year before – proving that you can get back out into the real world, you’ve just got to have a well structured and comprehensive plan, and stick to it!

The risk off theme wasn’t just prevalent in the UK and though not to as great an extent, the US session also faltered and posted some losses. We saw Joe Biden release his economic “Build Back Better” plan yesterday; a $700bn pledge to invest in American products and R&D to make sure taxpayers money is being spent bolstering US economic activity rather than bolstering other countries’, he also wants to see loopholes closed around what constitutes an item being advertised as ‘made in America’. This part of the plan isn’t dissimilar to the White House’s agenda, but it will no doubt irk The Donald that Sleepy Joe managed to get it out there ahead of him. The markets weren’t overly impressed by the plan, not because they don’t want to see money spent on recovery, but because now both presidential contenders are calling for a more localised, more insular approach to trade rather than the broader global approach that Biden presumably would have had before Covid derailed the American economy. Outside of Buying American, the campaigns diverge considerably, with Biden striking out at corporate America for not paying their fair share of taxes and calling an end to “the era of shareholder capitalism – the idea that the only responsibility a corporation has is to its shareholders” – this too got Wall Street worried.

This move away from risk went full circle, with the Chinese markets falling on the news that a couple of state back investment funds have trimmed their holdings of certain companies within the Shanghai Composite Index. The news is seen as Beijing intentionally trying to take some steam out of the markets, which they may view as setting themselves up for a bigger fall than needs be if things keep only moving higher. The Index has seen massive gains in the first part of July, climbing 15% in just six trading sessions, before the government started selling, so the move is probably a sensible one.

In the press: The Telegraph are writing about a warning from the Institute of Fiscal Studies, who say that the UK’s borrowing over this year and next is likely to weigh on the economy for decades to come. They’re forecasting borrowing next year to come in at £150bn, which is as much as it was in 2010 at the peak of the financial crisis fallout. This increased debt burden hasn’t been faced since the second world war, however it is affordable as long as rates are low – fine for now, but not guaranteed for the future. The IFS say that tax rises will be on the horizon, but the sort of rise you need to keep the debt-GDP ratio stable works out to basic rate income tax rising to 27% – any government that does that wouldn’t be getting a second term in office, so it will be down to Mr Sunak to be incredibly creative in raising that sort of money from elsewhere.

Reuters talk about the financial services industry warning the Bank of England about a turbulent end to 2020. The BoE’s Money Markets Committee have warned that the end of the furlough scheme, Brexit and a US election all happen within a two month period and that could make for an uncomfortable time in the markets – particularly with the Christmas period normally taking a lot of liquidity out of the system. Our take is that 60 days is actually quite a long period of time at the moment and the Bank of England seem to be pretty good at reacting very quickly to challenges laid out and by all accounts pre-empting them, so to quote some real words of wisdom ‘the real troubles in your life are apt to be things that never crossed your worried mind, the kind that blindside you at 4 pm on some idle Tuesday” !

In Europe: Paschal Donohoe is a name you might not be familiar with, but you certainly won’t envy him – he’s Ireland’s finance minister and is now the chair of the Eurogroup of finance ministers. His role will be to try and coordinate Europe’s financial recovery and manage the widely divergent approaches within that group of individuals. His two and half year term begins on Sunday and we wish him luck.

In the US we saw another record breaking day for Covid cases, with 60,000 confirmed yesterday. The resurgence of the virus has led Nancy Pelosi to say that the $1 trillion price tag that Republicans are floating for the next bailout fund needs to be at least twice that amount. Ms Pelosi is well within her rights to call for more, but as we pointed out yesterday, procrastination over what’s coming is only leading to more spending aversion and therefore more economic recovery constraints, so perhaps take the trillion and then go again in September?

Today we’re looking at very limited economic data, so we feel that however the markets open today will be the tone that they take into the weekend.

Be well


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