Unfortunately there is nothing new to write home about so far this week, as the key theme impacting global equity markets is a familiar one: coronavirus negativity is dominating sentiment as global daily new inflection numbers continue to rise, and as a result, lockdown restrictions are being imposed across Europe. Additionally, the continuing US fiscal stimulus stalemate hasn’t helped – although as we have said ad nauseam, the chances of a new fiscal stimulus deal being agreed before the Presidential election on Tuesday 3 November 2020 was always a long shot.
However, it is worth stressing that while the new coronavirus lockdown restrictions will undoubtedly slow the global economic recovery, they aren’t as severe or widespread as the restrictions imposed earlier in the year – and as such we believe it will only slow the recovery from the current ‘V-shape’ to one resembling a ‘Nike Swoosh’.
Additionally, as we have previously stated, as a result it is highly likely that governments and central banks around the world will mitigate some of the damage with additional stimulus packages – for example, no matter who wins the US Presidency, we know we will get a new US fiscal stimulus package.
In the UK we obviously have the added uncertainty of Brexit. However, it is clear from the comments by MPs over the weekend that Boris Johnson didn’t fully shut the door on further Brexit talks with the EU – although we must accept that we are clearly moving rapidly closer to the end game where we are potentially going to lose, in some shape or form, the unlimited access to the single market that we currently have.
However, at the risk of sounding pollyannaish, Brexit coupled with the economic damage as a result of the coronavirus outbreak will, we believe, lead to the Bank of England (BoE) easing monetary policy further, with more QE and taking interest rates negative. This belief has been underpinned by this morning’s UK CPI inflation data. As expected (please see here), while inflation strengthened by 0.4% in September, this was predominately due to restaurant prices following the end of the government’s ‘eat out to help out’ scheme, but with the headline rate at 0.5% and the core rate (which excludes volatile items such as food and energy) at 1.3%, both remain subdued and well below the BoE’s 2% target.
While we fully accept that US fiscal stimulus and UK monetary stimulus may not be the remedy for all our economic problems, but combined with improving company profitability it does provide a big positive for equity markets – although, as we have previously warned, equity market volatility will unfortunately remain elevated in the short-term (and unfortunately, as we write the FTSE-100 is down around 90 points, or 1.50% this morning at 5,800).
Economic data this week from China clearly demonstrates how quickly economies can rebound: Chinese industrial production jumped 6.9% and retail sales climbed 3.3% in September, while Q3 GDP rose 4.9%. This clearly puts China on track to have a larger economy at the end of the year than it had at the start! In fact the International Monetary Fund (IMF) is now forecasting that the Chinese economy will grow by 1.9% in 2020 – and to put that into perspective, the UK is expected to be 9.8% smaller, while the US is expected to shrink by 4.3%.
Additionally, we have also had a positive announcement regarding a coronavirus vaccine: the US pharmaceutical company Pfizer, stated it is hoping to get ‘emergency use authorisation’ for its coronavirus vaccine as soon as late November. Although this is not the same as approval, it does mean that the vaccine will be available for use – and of course, a vaccine will allow economies to fully reopen and thus speed up the economic recovery.