Good Morning,

UK consumer confidence is at its lowest level since 2009, according to the latest GfK survey, however the data also shows that it hasn’t fallen dramatically from the end of April (-33) to the middle of May (-34). The survey is made of a few sub-categories, a couple of which actually improved marginally; people were slightly more confident about their personal finances over the coming year as were their plans for ‘major purchases’. These increases were offset by the consumers views that the overall economic situation is going to get worse in the year ahead.

According to the Telegraph, there’s a majority in the cabinet that want to lift the lockdown: They want to see a big ‘back to work’ drive next month to try and get things moving again, providing there is no major increase in the R number over the next ten days. There are no scheduled changes to the lockdown protocols this month, but by the end of next week we could find ourselves being urged to get back to normal ASAP. A point made by Theo Paphitis on BBC breakfast this morning was that the longer we go on, the more people’s habits will change for goo, which could accelerate the demise of the high street by as much as five years in his view (on that note, retail sales fell by 18% last month, the most on record). The government will be wary of this virus enforcing long term cultural shifts, as their model isn’t designed with that in mind.

There’s more press coverage of negative rates, this time from UK banks, who say it would be disastrous for them: They’re concerned that the introduction of interest rates below zero would hamper their profitability and reduce their abilities to absorb losses from defaults, which would in turn harm their ability to lend and basically be counter-intuitive to the whole programme of negative rates. An FT article points to some research by Bank of America that says a cut to -0.25% would see Barclays pre-tax profit reduced by 50% and RBS’ down by 70%. Losing money to bad debts and then having your profits chopped in half doesn’t sound appealing at all.

The onshoring has begun… Boris has said he wants the UK to become self-sufficient when it comes to medical supplies and key strategic imports. ‘Project Defend’ will look at where the UK is vulnerable to global supply chains and the government may intervene to repatriate the manufacture of these products. The move makes all sorts of sense from a security point of view, but definitely doesn’t from a cost perspective: The UK and other countries have spent years becoming rich by having things made abroad where labour is cheaper and standards are lower, which meant we could consume more for less. Bringing manufacturing back means that jobs will be created, but that products become more expensive, potentially reducing demand for them. That’s not to say that we need to keep consumption at Before Covid levels and plenty would agree that it had all got a bit out of hand, but it is to highlight that there will be an impact. Taking a long term view; globalisation has played a large part in wars not breaking out, because trade has made people richer, but with less of it going on there’s less incentive to keep the peace.

Turkey cut their interest rates again, as they try the one trick they’ve got to stimulate the economy. This is the 9th straight cut from the central bank, bringing the rate down to 8.25%, with more likely to come. The country is having a nightmare trying to balance the opposing issues of keeping its currency stable and keeping the economy going – with the former requiring interest rates to stay constant and the latter requiring them to be significantly lower. In cutting rates and weakening the Lira, the central bank has been forced to burn through its foreign exchange reserves to prop up the Lira. It’s been asking for ‘swap lines’ from other central banks to allow them to exchange Lira for hard currency such as the dollar, sell that hard currency back to Lira which helps boost the Lira’s value and then repay the hard currency at a time in the future. The problem is that those requests for swap lines have fallen on deaf ears so far, with the only exception being Qatar, which has tripled the size of its line with Turkey to $15bn. This will keep the wolves from the door for now but, if the economic situation persists, it won’t be long before markets test the resolve of the central bank again.

Now we know from recent court rulings that the Germans like their central bank to act proportionately and within the letter and spirit of the law, however we wonder how quickly they’d be asking the ECB to grant swap lines with Turkey if President Erdogan threatened to stop supporting the millions of refugees that Turkey is currently home to and let them cross his side of the border freely? Europe’s banking system also has a vested interest in the stability of the Turkish Lira, as European banks hold a reasonable chunk of Turkish debt. With the numbers that are being thrown around at the moment, a hundred billion or so of exposure doesn’t seem unmanageable, and it probably isn’t, but if you’re racking up bad debts across your domestic commercial and consumer lending portfolios, you don’t really want to add to that burden with significant write-offs elsewhere.

Staying with embattled emerging markets; Brazil’s president Bolsonaro is fighting hard to block the release of a recording of a cabinet meeting. The two hour video is apparently riddled with paranoia, expletives and also abuse levelled towards China, their largest trading partner. Additionally it may further implicate him in the nepotistic motivations for sacking the head of the federal police. Surely it’s just a matter of time for this guy?

Looking to today; retail sales have been and gone, UK public sector borrowing was £62.1bn in April, which is more than £50bn higher than April last year. That’s pretty much it in terms of data today, but we’ve got the minutes of the last ECB meeting published at lunchtime (imagine that’s going to be a riveting read) There could be some more talk from the US over the weekend about a further stimulus package. It’s a UK public holiday on Monday and with the lions share of trading volumes in Europe going through London, we’d expect some volatility in our absence on that day.

Be well

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