Market Overview April 2020
The pound plummeted to multi-decade lows (since the mid-80s) on falling sentiment and concern over the UK’s approach to containing the coronavirus outbreak. Brexit was beginning to weigh on sterling prior to this so we’ve seen a bit of a double whammy for the currency.
As global markets have sold off UK equities have suffered the biggest falls in the world. Partly because the FTSE 100 is very internationally exposed and partly due to overall sentiment as discussed above.
In response, the Bank of England launched huge monetary stimulus and committed to printing any amount of money necessary to aid the economy, provided cheap lending to banks and even directly to large businesses, and is openly talking about the potential need for helicopter money, which was viewed as even too extreme during the depths of the 2008 financial crisis.
The Chancellor announced the largest fiscal stimulus package in UK history, subsidising 80% of workers’ wages up to £30,000 per year to discourage employers laying off workers, announcing they will guarantee 80% of all loans made to businesses, measures to give interest-free loans to businesses in trouble and making it clear the Treasury would do whatever it takes to support the UK economy during this crisis. The measures were welcomed by all including trade union bosses and the opposition Labour party.
The results season has drawn prematurely to a halt, or at least it has been postponed, following on from a recommendation by the FCA, and companies are now being actively discouraged from paying dividends during this crisis.
In its own response to the coronavirus outbreak and the clearly sizeable economic impact on the Eurozone, The European Central Bank (ECB) added at least another other €870bn to its quantitative easing (QE) programme in 2020, launched cheap liquidity for banks and eased the regulatory burden for the financial sector. This followed from rather irresponsible comments from ECB President Lagarde that spooked markets when she suggested that the ECB was not there to narrow spreads between various eurozone government bonds.
The European Union in general is struggling to agree on stimulus action. Many nations are calling for ‘coronabonds’ issued across the entire region and aimed at aiding where necessary, however some countries – mainly Germany – are concerned and have held up this form of stimulus.There are positive signs from Italy and Spain that the outbreak seems to be levelling off as infections and death rates seem to slow.
Russia meanwhile is sending aid all around the world including to the US, whilst claiming they have not seen a severe outbreak as yet. It is unlikely Russia has not or will not suffer as other European nations have done.
The Federal Reserve cut interest rates to record lows in March in an attempt to combat the negative economic effects of the coronavirus outbreak. It also announced record levels of stimulus, including a commitment to open-ended unlimited quantitative easing. The Fed has already injected more into the economy since that announcement than since the 2008 financial crisis. The size of monetary and fiscal stimulus in the US exceeds 25% of GDP, a totally unprecedented amount. Markets have reacted positively so far to this and despite lack of clarity over the true economic cost of COVID-19, are continuing to move positively into April. Q1 2020 has been the worst month for equities since the 2008 crash.
US fiscal policy is more focused on dealing with unemployment than preventing unemployment, so the claims number is likely to stay high. The Democrats and Republicans finally managed to agree a stimulus plan that injects $2 trillion into the economy. Even this though, is being doubted as enough and lawmakers are already touting a possible 4th round of fiscal support.
Wall Street also managed to notch up its best 3-day run since 1931, bringing the Dow Jones Industrial Average into official bull market territory, though still well below the levels seen before the selloff (roughly 15% down).
The Democratic presidential nominations are on hold for the time being.
China has begun rolling back the quarantine measures brought in weeks ago to contain the coronavirus outbreak. Satellite data shows pollution is picking back up again as the Chinese begin to resume their daily lives. Worries remain about the potential for a second wave of infections though. The Chinese government have temporarily banned all foreigners from entering the country to mitigate the risks of a second wave breakout.
Chinese PMI data beat estimates by the most in history at the end of March. Numbers from China are always taken with a pinch of salt, but this does point to a recovery in economic activity since the initial coronavirus outbreak.
Record new infections in Tokyo prompted warnings from government to residents that staying indoors was very important, however stopped short of imposing such restrictions. In March, the Japanese government downgraded their assessment of economic conditions to “severe” from previously moderate recovery in February. The Japanese government are working on a stimulus package that includes cash payments to households whose incomes have been impacted by the outbreak and is expected to begin in May.
India has ordered citizens (all 1.3 billion of them) to remain indoors until April 15th in a drastic lockdown effort. Indian companies however are only just beginning to understand the impact of the virus and importantly the economic impact of imposed government shutdowns. India’s record on taking care of the poor is not overly positive at the best of times, and worries remain over the government’s true intent to deal with those who are less able to seek medical care. This crisis could get very bad very quickly in a country as densely populated as India.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at the 2nd April 2020 and are subject to change. The update is for information purposes only.