Markets are waiting for a coronavirus vaccine as keenly as a furloughed worker scanning the driveway for an Uber Eats delivery. So, it was no surprise that they enjoyed another boost last week after positive COVID-19 vaccine trial results made the headlines. They rose again on better-than-expected US jobs figures on Thursday, which showed a drop in unemployment from 13.3% to 11.1%. Together, these pieces of good news contributed to a broad rally last week that saw the S&P 500 end the quarter up 20%.
The rally defied reports of a surge in coronavirus cases in the US, with daily infections topping 50,000 for the first time on Wednesday. Populous states like Texas and California were badly affected. Investors are keenly aware of the risks this presents, and one sign of their growing caution came from the lower-rated end of the US bond market, where investors sold junk bonds at the fastest rate since the start of the pandemic on news of the increase in cases.
Attention also turned to the upcoming election, and Biden’s growing popularity. A Citigroup poll of 140 fund managers revealed that 62% believe the challenger will win in November. This will begin to impact markets as investors decide how his proposals on tax, the minimum wage and climate will affect, or perhaps hurt, US business. One common view is that his proposed corporate tax increase will sting, but an expected easing of trade tensions with China might act as a benign backdrop.
Banking on support
In the UK last week, 30-year government bond yields dropped to a level below Japan’s (which are famously low). This is striking in the context of the UK borrowing heavily to fund its response to the coronavirus – which, on its own, might be expected to push yields higher.
A large bond-buying programme from the Bank of England helps to explain the news. Central bank actions such as these have helped to reassure markets since they were implemented in March. Capital Economics doesn’t expect to see another panic in financial markets, even if the number of coronavirus cases in the US continues to rise, as central banks have signalled that they’ll step in again if necessary.
“One thing which we know we can rely on for the foreseeable future is central bank asset purchases,” agrees Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.
In China, two pieces of data last week gave encouraging signs to investors that its economic recovery is underway. Investor sentiment lifted early in the week thanks to positive manufacturing data, while on Friday, a survey of China’s services sector pointed towards higher consumer spending. The country’s blue-chip CSI300 benchmark index ended the week at its highest level in five years.
However, the political situation in Hong Kong continues to deteriorate. Last week Beijing imposed its sweeping national security law over Asia’s financial hub, in a major blow to its autonomy. The move attracted international criticism, but a muted response in the markets suggests that investors have digested the news.
“Last week has actually been the busiest for IPOs in Hong Kong so far this year, which suggests that the political developments are not a deterrent for companies to list here,” notes Martin Hennecke, Asia Investment Director at St. James’s Place. He adds that demand for secondary listings of Chinese firms with primary listings in the US has stayed strong.
Whether it takes the form of a V, a U, or an L, the shape of the global recovery will be illuminated in coming weeks. We can expect some clues soon in the form of company earnings results, now that the second quarter has closed. One answer at the more pessimistic end of the spectrum arrived early last week from Airbus, which announced a cut of 15,000 jobs in the face of low demand for its jets. Even more alarming was the CEO’s stark prediction that air traffic won’t return to pre-COVID levels before 2023.
Earlier this year, Airbus had been expected to increase production of its popular single-aisle aircraft, the A320, and enjoy an uplift in servicing revenues for other jets, notes Gavin Marriott of Schroders, managers of the St. James’s Place Managed Growth fund. But that changed fast after the coronavirus hit. “The issues faced by airlines in the face of the material deceleration caused by COVID-19 has severely undermined this thesis”, he adds, noting that the fund exited its position in Airbus earlier this year.
Airbus’s fate is a useful case study for those arguing a V-shaped recovery is unlikely. But it’s wise not to over-extrapolate. Aviation is famously prone to what are known in the industry as ‘external shocks’: incidents like natural disasters or terrorism, which stop people buying tickets for flights. Airline executives who’ve weathered a few shocks are fond of a cynical industry joke: “What’s the best way to make a million dollars? Buy an airline for a billion.”
The caution ‘Drink responsibly’ took on a new meaning this weekend, as pubs and bars reopened for the first time since March with social distancing measures in place. Customers were told to stay a metre plus apart, order drinks through their phones and not ‘overdo it’.
The controlled reopening of the hospitality sector reveals just how tricky it is to safely restart the economy. Busy pubs and bars will stimulate the economy but risk a second wave. Yet, if not enough people return, businesses will go bust and more jobs will be lost.
On Wednesday, Chancellor Rishi Sunak is expected to announce a raft of measures to help support businesses, protect jobs and encourage household spending.
A cut to VAT to temporarily boost the economy could be on the cards, to encourage households to spend the savings they have accumulated over the lockdown period. Former chancellor Sajid Javid has advocated this measure – but with a VAT cut of only 3% costing the Treasury an estimated £21 billion, consumer spending needs to be in full force for this to be effective.
The chancellor may try to ease conditions for businesses by reducing the level of employer National Insurance contributions, or relaxing the conditions for repaying the Coronavirus Business Interruption Loan Scheme. This could prevent a surge in job losses – which are forecast if no extra stimulus is provided – and give businesses extra cash to invest.
It’s likely that the chancellor will use the Autumn Budget to address government borrowing, which is set to pass £300 billion1. Ultra-low interest rates mean that this is sustainable for the moment, but higher taxes or spending cuts are on the horizon as the government takes steps to reduce the deficit.
1 Office for Budget Responsibility, May 2020
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
In The Picture
The market capitalisation of Tesla, the electric car maker, overtook that of Toyota last week. Co-founded by controversial entrepreneur Elon Musk, the company makes fewer vehicles and is less profitable than its Japanese counterpart, but is viewed as a leader in the future of transport.
The Last Word
We must now realise the promise of America by trusting God, unifying our vision and building our future. I am running for president of the United States! #2020VISION
Kanye West, rapper and entrepeneur, announced his presidential bid via Twitter on Sunday.
BlueBay and Schroders are fund managers for St. James’s Place.
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