Morning Report – Monday 22nd June

Main Headlines

The BOE should trim its balance sheet before raising rates, Governor Andrew Bailey said, signalling a major shift in strategy for removing the emergency stimulus. The balance sheet has swelled to almost 700 billion pounds and is set to grow much larger. His predecessor Mark Carney has said the central bank will wait until rates hit 1.5% before reducing its stock of assets. U.K. Chancellor Rishi Sunak is mulling an emergency cut to the value-added tax, The Sunday Times reported.

The pound pared gains after Bailey’s comments. European stock futures tumbled after Wirecard said missing funds probably didn’t exist. Asian equities posted mild losses, with Hong Kong sliding after Beijing released details of a national security law for the city. U.S. futures drifted higher with Treasuries and Gold rose. Brent slipped but stayed above $42.

China’s proposed national security law will allow Beijing to override Hong Kong’s independent legal system. A draft states that the central government will have jurisdiction over some national security cases, and will install a new police agency in the city. A pro-democracy legislator warned the law will spur an “exodus of young professionals.”

GBP

Sterling posted its worst week since mid-May after fresh data on Friday showed government borrowing had hit record highs, more evidence that the coronavirus hit economy was a long way from recovering. Britain’s public debt exceeded economic output for the first time since 1963, when the country was still paying off debt from World War Two. Earlier on Friday, the pound rose briefly on data showing retail sales rebounded in May more than expected after April’s slump. But traders soon shifted their attention to the surge in UK public debt.

EUR

EU leaders agreed on Friday that urgent action was needed to haul their coronavirus-hit economies from the deepest recession since World War Two, but made no progress on a massive stimulus plan that has divided them bitterly for weeks. The 27 members avoided a bruising bust-up during a summit by video conference which lasted several hours, and agreed to meet in person in mid-July to negotiate and finally push through a long-term budget and economic rescue package worth 1.85 trillion euros. Italy’s budget deficit, currently projected to reach 10.4% of domestic output this year, is likely to expand further as the country tries to prop up the economy amid the coronavirus pandemic, Prime Minister Giuseppe Conte said on Sunday.

USD

The U.S. dollar hung on to most of modest gains made last week, as investors opted for safety on Monday in the face of renewed worries about a second wave of coronavirus infections globally.

Main Economic Data/Central Banks/Government (All Times BST)

8:00 a.m.: Turkey June consumer confidence
3:00 p.m.: Euro-Area June consumer confidence
4:15 p.m.: ECB’s Guindos speaks
5:30 p.m.: ECB’s Lane speaks