It has been another week of turbulent news on COVID infection rates, this time focusing on Europe, and combined with some poor earnings reports from large UK companies, the markets have had a negative week.
Last weekend saw the abrupt closure of the sky bridge between Spain and the UK as the pandemic returned to Catalonia. We have seen a further increase in infection rates in France and whilst US rates appear to be stabilising, their death rate is now on the rise again. Yesterday in the US, we saw 60,000 new cases of COVID-19, more than double the rate of the previous March/April peak and Spain saw just over 1,000 new cases. In France there were over 900 new cases yesterday. For some context, in the UK we saw 846 new cases, the highest number since the end of last month.
The economic data this week highlighted the impact of the pandemic, with very poor second quarter economic growth numbers published for the US and in Europe. US GDP fell by an annualised rate of 32.9% in the second quarter, slightly better than expected but still by far the worst rate of growth since the end of World War II. The Eurozone bloc contracted by 12.1% in the quarter as per preliminary figures released this morning, and activity was down 15% compared to the same quarter in 2019. The numbers for both the US and Europe highlight the economic damage caused by the lockdowns in response to the pandemic, and while we are likely to see a rebound in the current quarter, the strength of that rebound will come into question given the ongoing presence and impact of the coronavirus.
The US Federal Reserve (Fed) meeting that concluded on Wednesday resulted in no change to policy with interest rates held close to zero and a continued pledge to do more to support the recovery if necessary. Fed Chair Jay Powell voiced concerns that increasing Covid-19 case numbers were weighing more heavily on economic activity, citing high frequency data on consumer surveys, unemployment, credit card spending, hotel occupancy and restaurant bookings. He warned that the fate of the US economy would “depend significantly on the course of the virus”. He noted the importance of continued fiscal and monetary support, saying “the fiscal policy actions that have been taken thus far have made a critical difference to families, businesses and communities across the country”. Powell said the current economic downturn “is the most severe in our lifetimes” and it “will take a while to get back to the levels of economic activity that prevailed at the beginning of the year and it will take continued support and both monetary and fiscal policy to achieve that”.
The US dollar continued to weaken after the Fed meeting, with the dollar index (based on the strength of the dollar against a basket of major currencies) now down 4% this month. This is positive for global financial conditions and caused the price of Gold push to new all-time highs, driven higher by longer-term concerns over the debasement of currencies through money printing and ever-present quantitative easing funding government spending. In addition, medium-term concerns over inflation and the recent strength of gold as a safe haven have all driven the price higher.
In terms of fiscal support, the Republican party unveiled their stimulus plan amounting to $1trillion of new stimulus, to include another round of $1,200 payments to individuals with an annual salary below $75,000. The most divisive part of the proposal remains the planned reduction of the current $600/week Federal Unemployment benefit to $200/week for two months, after which time it will switch to 70% of a claimant’s previous earnings. The Democratic speaker of the House of Representatives, Nancy Pelosi, called it a “pathetic piecemeal approach” but said she “hoped to find common ground”. With the unemployment benefit expiring today, and Congress entering summer recess at the end of next week, the pressure is on to reach an agreement in a short space of time. The expiry of benefits can be blamed on the failure of US politicians to start negotiations on the next tranche of stimulus until this week, and certainly poses future downside risks to consumer spending as the high frequency data referred to by the Fed is already showing signs of weakening.
Since the market lows of 23rd March, we have seen liquidity from the central banks win the battle against a backdrop of heightened risks – including the Covid-19 pandemic itself, economic data and political risks ranging from Brexit to the US election and deteriorating US-China relations. We still do not know the strength of the economic recovery, but it seems obvious that the persistence of the Covid-19 virus means that moves towards normality will not be seen over the shorter term. What that does mean is fiscal support will continue, as will the support of the central banks. The former will support consumers, and the latter will give a cushion for financial assets. We have seen increased volatility again this week, however we are pleased to report that our portfolios have navigated this volatility well and we will continue to monitor events carefully over the summer.