UK SET TO MORE THAN DOUBLE PREVIOUS RECORD GILT ISSUANCE

UK SET TO MORE THAN DOUBLE PREVIOUS RECORD GILT ISSUANCE

This week we got a glimpse of the full cost of fighting the coronavirus when 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, if not decades, 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 per cent over Donald Trump nationally and 8 per cent up on average in the crucial battle ground states, so people are taking notice of what a Biden administration might mean. With the outlook so uncertain, things are just as likely to get worse as get better for Trump between now and November.

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. This week has seen 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, as all the banks reported a surge in trading revenues – particularly in fixed income markets. Emergency fund raising for clients has also proved positive. The results also highlight potential 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. Potentially 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 but, with the outlook uncertain, Americans have taken a cautious approach to their finances and are spending less and paying off outstanding balances.

UK: 2-YEAR GILT YIELDS DROP BELOW JAPANESE GOVT DEBT FOR FIRST TIME

Demand for gilts shows no signs of easing despite the huge volume of new debt being issued this year. Earlier this week the yield on two-year gilts hit a record low

of -0.13% and briefly dropped below the rate of two-year Japanese government debt. The government also issued a new three-year gilt at a record low yield of -0.069 per cent. The increase in gilt prices has been put down to caution as investors worry about the continued spread of the coronavirus and also to growing expectations that the Bank of England could introduce negative interest rates in the autumn.

The UK is set to issue a record amount of debt this year to help pay for the coronavirus crisis. The government announced plans to raise £385bn through new bond issues between April and November. This far exceeds the £227.5bn issued for the whole of 2009/2010 in the aftermath of the global financial crisis. If the government keeps borrowing at its current rate it is on track to raise £533bn this financial year.

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. Yesterday saw the biggest one day drop since February as the CSI 300 index fell 4.8 per cent to leave

it down 4 per cent on the week. The index is still up around 6 per cent for the month of July but the exuberance of investors has been dented by economic data that suggests China’s economic recovery is not a broad based as it been assumed.

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.