Morning Report – Wednesday 12th August

Main Headlines

The U.K. economy suffered worse than any other major European nation during the coronavirus lockdowns, posting a 20.4% contraction in the second quarter that will raise more questions over the government’s handling of the pandemic. The record slump, after a 2.2% drop in the first three months of the year, also outstripped the U.S. downturn and officially pushed Britain into its first recession since 2009. It follows a report yesterday that showed hundreds of thousands of people have lost their jobs.

Gold collapsed below $1,900 as the rout extends into a second day. It is on course for its biggest two day loss in more than seven years as investors step back from one of the hottest trades of 2020. After setting a record of $2,075 an ounce last week, gold’s rally has come to a juddering halt as U.S. bond yields advanced, eroding the haven’s appeal.

European equity futures sank along with most Asian stock markets overnight as concerns over the timing of a spending package from Washington increase and some profit taking in high-flying sectors. Shares fell in Shanghai, Sydney and Hong Kong, while Japanese stocks bucked the trend. S&P 500 contracts were mixed after the benchmark fell for the first time in eight trading. Also weighing on sentiment were comments from Senate Majority Leader Mitch McConnell saying stimulus talks are at a stalemate. Treasury yields held their overnight rise.

GBP

Last week the Bank of England forecast it would take until the final quarter of 2021 for the economy to regain its previous size, and warned unemployment was likely to rise sharply. The Q2 slump in GDP was almost exactly in line with forecasts, and exceeded the 12.1% drop in the euro zone and the 9.5% quarter-on-quarter fall in the United States. The pound lost some ground this morning on release of the data.

EUR

The euro is still in consolidation after a 4.8% jump in July sent the currency flying through a bearish trend line that capped gains since 2008, unlocking its potential for more rallies. While the currency has taken a breather in August – rising only 0.2% – net long positions rose to an all-time high, according to CFTC data.

USD

The dollar inched higher overnight, as a jump in U.S. yields pushed it higher against the Japanese yen, while the kiwi briefly hit a one month low after the central bank extended its bond buying programme. The yield on 10-year U.S. debt, which rises when bond prices fall, made its steepest gain in two months on Tuesday ahead of the largest ever 10-year auction later today.

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

7:00 a.m.: UK Trade Balance
7:00 a.m.: UK Q2 GDP
10:00 a.m.: Eurozone Industrial Production
10:00 a.m.: Italy CPI
1:30 p.m.: US CPI