After a decent start, equity markets moved lower this week against a backdrop of fading prospects for a new round of fiscal stimulus in the US in the near term and continued rises in cases of COVID-19 across Europe and the US, twinned with Brexit stalemate.
The short lived optimism at the start of the week over a possible $1.8 trillion stimulus package in the US was replaced with a stark reality that stimulus ahead of the US election is becoming increasingly unlikely and now appears to be weighing on market sentiment. Even as the President continues to push Congress to deliver fiscal measures before the election, proposals for specific packages for airlines and small businesses continue to be dismissed by the Democrats as "not nearly enough". On Wednesday, Treasury Secretary Steven Mnuchin cast doubt on a stimulus deal being secured in the next few weeks, commenting that despite progress in talks with the Democrats, the two sides remained "far apart ". With the prospects for stimulus in the short-term diminishing, this could mean we need to wait until the new year and for a new President to see new stimulus.
The International Monetary Fund (IMF) published their biannual global economic outlook and warned that Covid-19 could cause “lasting damage” on living standards globally, with the potential for taxes on the wealthy and also on companies needing to rise in the long term, to offset the rise in government borrowing as a result of the pandemic. The IMF said the pandemic would leave significant scars on the global economy in the form of job losses and bankruptcies, with sectors of the economy left unviable. Chief Economist Gita Gopinath said that the period of economic recovery will be "long, uneven and highly uncertain", forecasting that global growth in 2020 will be the worst since the 1930s Great Depression. This is despite their forecast having been revised higher thanks to the Q2 recession being shallower than feared, with a faster recovery as lockdowns eased. The IMF expect growth of -4.4% in 2020 for the world economy; this compares to their previous estimate of -5.2% made in June. Assuming the pandemic is controlled, they expect a rebound of +5.2% in 2021. The IMF called for substantially more action going forwards, including global collaboration on tests, treatments and vaccines, income support to limit persistent economic damage, packages to help workers retrain and reskill and, over the long term, green infrastructure investment and a roadmap to fiscal sustainability. However, they noted they would not be recommending a return to austerity to reduce government budget deficits. Clearly there are lessons being learned here from the aftermath of the financial crisis, when the austerity policies pursued by governments, and encouraged by the IMF, arguably delayed the economic recovery.
In terms of the coronavirus, the headlines continued to deteriorate over the course of the week. Significant restrictive measures were adopted, particularly in Western Europe, to combat the rising number of cases even before winter begins. In the UK, the government, as expected, introduced a tiered level of restrictions for England, the highest of which will see the closure of non-food pubs, gyms, leisure centres and betting shops. The government was swiftly criticised for these measures not going far enough and the Labour party called for significantly tougher measures to be imposed in order to slow rising case numbers. The Prime Minister noted that there are now as many people in hospital with Covid-19 as when the lockdown was imposed back in March, but said his regional approach to lockdowns “would drive down the virus”. The PM also told Parliament "I rule out nothing in combating the virus”. It is now clear that the government is not being ‘led by the science’ as they said they were earlier in the year, given that their own advisers (the SAGE group) recommended a "circuit breaker" lockdown in late September. This was rebuffed by the government, who chose the significantly looser restrictions of the ‘rule of six’ and reduced opening hours for pubs. Chief Medical Officer, Chris Witty, noted that he was "not confident" that the restrictions for areas deemed at very high risk under the new government system would be enough to get on top of the pandemic, and encouraged local authorities to adopt additional measures . However, local authorities appear to be reluctant to do so without further fiscal support.
The fracturing of the measures adopted against Covid-19 across the UK is becoming starker, with Northern Ireland now adopting a circuit breaker and Wales likely to follow suit, whilst England continues to take a less aggressive approach. Across Europe, restrictions continue to be ramped up, with the Netherlands and the Catalonia region of Spain closing bars and restaurants, while Paris and eight other French cities will see a daily curfew from 9pm to 6am for an initial four-week period. In the US, the number of cases continues to climb, with new cases averaging around 50,000 a day over the past week, and states that missed the initial and summer waves now seeing the worst of the case growth. What we are not seeing in the US so far is the aggressive measures to re-introduce restrictions and lockdowns that we are seeing in Europe, which may mean an economic benefit in the short term but could potentially extend the duration of the pandemic, weighing on the longer-term growth outlook.
Onto Brexit, and with the European Council concluding in Brussels today, the focus is on the UK Prime Minister’s reaction to the summit outcomes. The Council was told that progress in key areas was “not sufficient” to reach a deal and called on the UK to “make the necessary moves to make an agreement possible”. The European Council asked Michel Barnier to “continue his talks” with the UK, with the usual sticking points around the level playing field and fisheries still to be overcome. Barnier said that he was willing to travel to London next week for fresh “intensive” talks, adding that negotiations were “not finished” but that the EU was ready to accelerate talks from Monday for the “two or three weeks that remain before us”. It is clear that the EU does not intend to ‘walk away’ from these talks, but Boris Johnson may take a more aggressive tone when he makes a statement today, emphasising the ‘Australia’ option (i.e. no deal) and the need for concessions on both sides.
It seems like we are entering potentially a more volatile period for risk assets against the backdrop of worsening news on the pandemic for western economies and disappointment over the lack of fiscal stimulus in the US. Looking forwards, we hope to see resolution on the UK-EU trade arrangements, with the worst-case scenario of a WTO/Australia-type deal avoided. However, even a basic trade deal, which is the best we can hope for, will still involve a significant deviation from the frictionless trade that the UK has enjoyed for several decades.
The US election is now moving to the top of the agenda, and markets appear to be becoming increasingly comfortable with the thought of a ‘blue wave’ i.e. the Democrats taking both the presidency and control of Congress, thanks to Joe Biden’s consistently strong polling. However, we still see risks to the economy in the short term thanks to the lack of another round of fiscal stimulus. We are also mindful that the situation around the pandemic has worsened significantly in recent weeks, and while we have not seen anything like the lockdown measures imposed on economies back in March, the situation is likely to get worse before it gets better. This suggests to us that the economic roadmap remains highly uncertain in the short term, although we remain optimistic that the fiscal and monetary support will continue and will help the recovery progress into 2021, particularly if a vaccine is successfully deployed.