Good Morning,

To see a V shaped recovery, we might have to look at a slightly longer term chart… UK GDP came out this morning and showed that we’d only put on 1.8% growth in May compared to April (and April was about 20% lower than March). The market had expected a 5% increase and therefore its unsurprising that we’ve seen the Pound sell off and the FTSE futures market head south ahead of live trading, which starts shortly.
Some figures that bring a bit of comfort come from Barclaycard, who say that spending was down 14.5% in June compared to last year, which is actually the smallest year on year fall since lockdown began. This couples with British Retail consortium data that shows retail sales numbers in June actually outperformed June of last year, which is being put down to pent up demand from consumers. The BRC has welcomed the data, but warned that retail is by no means out of the woods.

On the note of recovery, the head of the Office for Budget Responsibility, Richard Hughes has said that the covid bailout loans that countless businesses have taken up may go from being a short term survival aid to a long term weight around their necks. He thinks that it could be the case that businesses with such a debt burden are less likely to invest and would therefore potentially just tread water rather than grow and drag the economy up with them. His recommendation is that loan repayments should be earnings-contingent, which would mean firms aren’t having to pay back amounts that are excessive relative to their turnover and would in turn allow them room to breathe and grow. The flip side of that is that if businesses don’t reach the earnings threshold then they might never have to pay back the loans and that would leave the government with a potential black hole to fill – though the government will know that their bailouts aren’t going to return 100 pence on the Pound anyway, so this could well be a more practical approach. The Telegraph has some more details on this.

In Europe, there are some concerns that the agreed upon EU bailout might not materialise. Angela Merkel has warned that it’s by no means a done deal and that the path to getting it across the line remains long. The main protagonist seems to be Dutch PM Mark Rutte, who is pushing hard for any monies distributed being contingent on structural reforms taking place. This hasn’t pleased the southern states, with Italian PM Conte warning that “it’s not in anybody’s interests to introduce conditionality that would compromise the support of the programme or give it scarce practical impact”. This nes hasn’t yet dampened the value of a euro.

KLM, the Dutch flag carrier, got a €3.4bn bailout yesterday, which is predominantly made up of state backed loans to be granted by commercial banks. The EU have approved the bailout which will solve the immediate liquidity problems of the airline, which is the Netherlands’ second largest private employer in the country.

Over in the US: California are shutting down gyms, churches, bars and indoor dining venues due to their covid spike. The state has seen an increase in daily cases by almost 50% over the last fortnight.
Staying in California, Tesla had a wild day of it yesterday, with the company up more than 16% on the day at one point, before closing the session 3% lower than it had started. The last time they had a 15% move higher was back in 2010, when their shares moved up from $17. Their share price is now $1,500! The move yesterday was being put down to short-sellers finally pulling the plug on their positions and having to go back into the market and buy back the shares they’d sold. Elon Musk was briefly worth $70.5bn as the stock surged higher, which put him ahead of Warren Buffet, at number seven on the global rich list.

In Asia, the big news is that the UK aircraft carrier HMS Queen Elizabeth is set to join the US and Japan for war games in the Far East. The move is being widely reported as the UK ‘confronting China’ and previously China had warned that any deployment of a carrier into the region would be a ‘hostile act’. The US are also set to officially reject China’s maritime claims in the South China Sea. The move is said to be largely symbolic, but yet another area that the countries can disagree on and further erode relations over.

Adding to the Anglo-Sino tensions will likely be a decision from government today to ban Huawei equipment being deployed into the UK’s 5G network and we could also see China’s investment in critical energy infrastructure blocked too.
There’s a good piece  in the FT today about UK-China relations, which have moved from a golden age under David Cameron to a deep freeze of late. It’s a long read, but worth the time.

Today we’ll be listening to a number of Federal Reserve speakers and also the possible announcement from the House of Commons on Huawei. Markets aren’t starting in the best mood, so risk aversion, if it continues, could well spill into the FX  market.

Be well.

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