UK Plans for Record Gilt Issuance:
Last week we got a glimpse of the full cost of fighting the coronavirus. The UK is currently set to more than double previous record Gilt issuance as a result. The Debt Management Office revealed it was on course to issue £533bn of debt this year. While the scale of the borrowing is huge, it arguably isn’t enough to offset the huge shock to the economy. Despite unprecedented levels of support from the Treasury we also learnt that over 650,000 jobs have been lost so far. The damage being wrought will take years to repair, even if the virus can be defeated much sooner. Thankfully the markets appear willing to give the Chancellor the funds needed to at least get started.
Elsewhere, Joe Biden has released a raft of progressive proposals on climate, taxation and housing. Recent polls put him up 10 percent over Donald Trump nationally. That equated to 8 percent up on average in the crucial battle ground states. So, people are taking notice of what a Biden administration might mean.
US: Banks Massively Increase Bad Loan Provisions
US banks kicked off second quarter reporting with a sharp increase in earnings offset by huge provisions for bad loans. Last week saw updates from Citigroup, Morgan Stanley, Bank of America, JP Morgan, Goldman Sachs and Wells Fargo. Government and central bank stimulus has been good for business. All the banks reported a surge in trading revenues – particularly in fixed income markets. Emergency fund raising for clients has also proved positive. But results also highlighted weakness in the US recovery as huge sums have been allocated to offset potential bad loans. In total, the six banks reporting this week have set aside $32.5bn.
The boost to revenues could prove short-lived as the uplift from trading revenues is likely to be temporary. More concerning for the banks is the immediate future of low interest rates combined with falling profits from credit cards. This is usually a very profitable business. However, with the outlook uncertain, Americans have taken a cautious approach to their finances. They are spending less and paying off outstanding balances.
CHINA: GDP Growth Scepticism Halts Equity Rally
Only a week ago the Chinese stock market was leaving other equity markets trailing in its wake. But it has come back to earth with a bump. Last week saw the biggest one day drop since February as the CSI 300 index fell 4.8 percent to leave it down 4 percent on the week. The index is still up around 6 per cent for the month of July. However, the exuberance of investors has been dented. This is probably down to recent economic data suggesting China’s economic recovery is not as broad based as first thought.
The latest Chinese GDP numbers show growth of 3.2 per cent for the three months to end June. This was much better than the 2.5 per cent expected, but investors are wary that the overall number is being boosted by growth in industrials, a sector dominated by state-owned firms. Chinese retail sales figures paint a more sober picture. The figure for June remains 1.8 per cent below June last year and this number has been negative for six consecutive months.