The World In A Week - Interim Update
They just keep on coming. The latest in stimulus packages, at a modest €130 billion, comes courtesy of Germany. This is for Germany rather than the Eurozone and was much larger than expected, with the emphasis firmly on increasing demand. It will include a cut to their VAT, several infrastructure projects and €300 for every child. This should make the meeting of the European Central Bank today a happier place and will help underscore the need for both fiscal and monetary support to continue unabated during this time.
While the headlines about COVID-19 start to diminish, the void is quickly replaced with political upheaval. The reigniting of the US vs China battleground has taken to the skies, with the proposed suspension of passenger flights arriving from China. China currently operates flights to the US but only with four domestic airlines. The friction comes from their continued ban of allowing US airlines to operate the route and the latest move adds pressure to release that ban, keeping the political leverage of tensions between the two countries firmly in place.
Another airline that is feeling the pressure of the lockdown is EasyJet, having been demoted to the FTSE 250 during the quarterly shake-up of the UK equity indices. Yesterday’s reshuffle saw airlines and travel companies among the sectors being relegated from the FTSE 100. Promotions to the FTSE 100 were companies with a digital focus, such as gaming company GVC Holdings, cyber-security firm Avast and home improvements business HomeServe. The FTSE 250 also had a similar focus for its promotions, with gaming firm 888 Holdings and online electrical retailer AO.com.
Is this an indication of what we have all been up to during the lockdown? Stockpiling frozen goods, DIY and playing online bingo.
The World In A Week - Lockdown Wind-down
The last week saw a broad risk-on sentiment emerge, with global Equities as measured by MSCI ACWI return +2.1% in GBP Terms. This was driven by Japanese and European Equities, while US Equities lagged driven partially by a weakening Dollar vs the Pound Sterling. Interestingly, “Value” equities strongly outperformed “Growth” equities by almost +2.0%. The Value segment of the market, which includes firms operating in the energy, financials and materials sectors, had been unloved by the market for some time – but has now potentially reached a point whereby they are so cheap relative to their Growth counterparts that there is room for significant upside.
It looks like the market is positioning for a scenario whereby economic growth picks up strongly following the pandemic lockdown, with an associated increase in inflation and a weakening of the ‘Almighty Dollar’ from historical highs. There is a reasonable basis for this positioning. Last week saw the continued advancement of a proposed €750bn recovery fund for the Eurozone, funded by mutually issued debt for the first time. This financial burden sharing would be one step towards resolving the structural flaws in the single currency.
Significant downside risks remain however, the principal one being that the economic recovery falls short of what the market is expecting or there is a significant second spike in coronavirus cases. To add to this, we face increased tension between China and the West over the latter’s designs on Hong Kong, as well as an upcoming US election amid rioting across American cities.
The World In A Week - Interim Update
News flow is beginning to contain something other than easing of lockdowns and vaccines.
Economies around the world are beginning to re-open, ahead of the schedules that were first announced back in the middle of March, and infection rates look to have largely been contained. The worst-case scenarios that made the headlines three months ago, now have a much lower probability of actually occurring.
Let us not forgot that any signs of market weakness have been met with additional support from central banks and governments. Japan’s announcement yesterday of an additional $1.1 trillion fiscal stimulus package continues that theory.
Whilst all of this is generally good news, the world’s media needs to find the next dramatic headline and as we wrote on Tuesday, the souring relations between the US and China are taking a more serious step. Last night, US Secretary of State, Pompeo, stated that the US could not consider Hong Kong as being autonomous from China, which does have significant consequences, as it may affect Hong Kong's special trading status with the US.
The political leverage that Donald Trump seeks to gain from managing the US/China relationship is becoming a key element in his re-election campaign. As we wrote last year, when the Phase 1 deal was penned, this New Cold War is not something that will dissipate anytime soon.
Finally, Brexit has once again hit the headlines. The EU have told Westminster that Brussels remains open to extending the transition period by up to two years. Talks on what the trade deal will look like remain unresolved, with the original target date of 30th June 2020 looking less likely to be met.
The World In A Week - Crunch Time
Tensions are running high. The balance between keeping economies locked down in order to protect the health services, and the desire to loosen lockdown measures in order to lessen the long-term impacts, is coming to a head.
Here in the UK, there has been tentative rhetoric that we are preparing to lift restrictions, but attention has shifted towards accusations that Boris Johnson’s senior aide broke lockdown rules. All nations will need unity to help with smoothing the economics of a bounce back, and Dominic Cummings’ actions will certainly be an unwelcome spanner in the planning.
In the US, we have already commented on the increasing pressures between itself and China, mainly at the finger of Trump’s Twitter account. Over the weekend, it was the turn of China’s foreign minister to ratchet up the tension, accusing the US of pushing relations to a New Cold War. All of this could mean short-term volatility in financial markets.
However, support for markets from both central banks and governments remains significant. Last week, France and Germany proposed a €500 billion Recovery Fund that would represent a significant step towards fiscal mutualisation in the Eurozone. What does this mean? The idea is that the distribution of the Fund’s resources will be based on need, while the burden of the repayment will be based on ability. This will treat the Eurozone as a whole, with the arguably stronger nations, such as France and Germany taking on greater burden, while less well-off nations, such as Italy and Spain, can benefit from the resources of the Fund.
We knew the route to combat COVID-19 would be uncertain and we appear to be at another inflection point. While the short term remains unclear for markets, the monetary and fiscal support appears to be the one constant.
The World In A Week - Interim Update
It is happening again. President Donald Trump has been busy with his Twitter account this week and the focus of his attention is China. Trump’s increasingly critical comments of China could be a worry for the longer-term economic bounce back.
Whilst pent-up demand during lockdown is potentially a boost for US growth in the short term, restoring the level of growth to where it was before COVID-19 will require a stronger underlying economy, and reawakening trade tensions with China will not help.
There is more at play here than meets the eye though; casting China as the villain has been successful in the past for Trump’s approval ratings, and in a recent survey amongst Republican voters, disapproval of China is at 72%. With the US Presidential Election not far off, seeds are already being planted for campaign strategies. For the Trump team, it will be a difficult balancing act of building political support and ultimately keeping the trade deal alive.
In the UK we saw the official rate of inflation drop significantly from 1.5% in March to 0.8% for April, and below economists’ expectations of 0.9%. Driven downwards by falling commodity prices, as well as reduced spending and increased savings, a result of having so many people in lockdown. This has prompted the Bank of England to make a U-turn on the possibility of negative interest rates in the UK.
The Governor of the Bank of England, Andrew Bailey, confirmed that policy had changed slightly and that they were reviewing all tools possible to help alleviate the impact of the coronavirus. He did stress that the Bank needed time to consider the implications of such a move and they want to see how the economy reacts to the previous rate cut to 0.1% before enacting further monetary policy.
The World In A Week – Interim Update
We knew it was coming, but that did not stop the market from overreacting to what is undeniably a certainty.
The UK economy shrank at the fastest monthly rate on record during March, due to the lockdown and the enforced economic slowdown. UK gross domestic product (GDP) fell 5.8% compared with the previous month, making it the largest drop since records of monthly GDP began in 1997.
It also meant that the UK has had its first quarter-on-quarter drop in GDP since the Global Financial Crisis. The 2% fall compares to falls of 1.2% for the US and 3.8% for the Eurozone. The recession will technically become official when we have a negative reading for this quarter, as you need two consecutive negative quarters for a recession.
Although much of this was widely expected, it did not stop the market reacting wildly. The first three days of this week saw the FTSE 100 swing more than 200 points, evidencing that volatility is here to stay. As we wrote on Monday, the likelihood of a ‘V’ shaped recovery has dissipated, and our base case of a ‘W’ shaped market is looking more probable.
That means more commitments of economic stimulus if markets became too unruly. In anticipation of this, we have already had proposals from the US of an additional $3 trillion fiscal package. However, there is a conflict building between those who see these extreme measures as absolutely necessary, and those that fear the spectre of rising debt will come back to haunt us. Exceptional times call for exceptional measures and ultimately the combined total of the global promises is essential to combat the global pandemic.
The World In A Week - Phoney War
Last week saw a moderate rise in the value of risk assets with the FTSE All Share up +0.65% and the MSCI All Country World Index down -0.36% in GBP terms, as the value of Sterling rose against the Dollar and many other major currencies. Within Equities, the Emerging Markets and Europe lead the way, while Japanese Equities lagged.
This sentiment was also broadly reflected in Fixed Income markets, Investment Grade Credit, High Yield Bonds and Emerging Market Debt all advanced – while Treasury returns were more subdued.
The relative tranquillity observed in markets was at odds with the slew of dreadful economic news that hit the headlines last week. It was announced that the US economy lost 20.5m jobs in April, rocketing the unemployment rate to 14.7% - a new post-war high. Consensus is now gathering that the likelihood of a “V shaped” recovery from the coronavirus is getting closer to zero. The unprecedented increases in unemployment are likely to take a long time to unwind, and consumer’s purchasing power and habits may well be changed for good.
However, since their nadir on the 23rd March 2020, Equity markets have paid little heed to the deteriorating economic fundamentals, with MSCI ACWI up +18.2% and the S&P 500 up +21% in GBP terms. In the riskier Fixed Income markets, we have also seen a strong rally in High Yield Bonds from their lows, although this is arguably not as over-extended as the Equity markets. As we celebrated Victory in Europe Day over the Bank Holiday weekend, it has begun to feel like a phoney war mentality has taken over the markets – one that may collide with reality in due course. While the rally demonstrates the necessity of maintaining market exposure through all stages of a cycle, we remain neutral on Equities at this point.
The World In A Week – Interim Update
A week that has been punctuated by uncertainty and conjecture. As we get to the end of the second three-week lockdown period in the UK, headlines are full of rumour. No one knows what the effect of easing the restrictions will be, and as we have written previously, fear is one of the biggest dangers to the economy.
The economics of ending a lockdown seem to depend on fear and confidence. Consumers need to have assurance around the security of their jobs and feel safe about their risks to their health. If that scenario occurs, then there is the likelihood of consumers spending that short-term pent-up demand.
The balancing act is all about the timing. Too soon and the conditions mentioned above will fail and the potential short-term economic bounce will be snuffed out. That is the tightrope politicians are walking; managing the populations’ expectations, with as light touch as possible around social control, while knowing the longer the delay, means the longer the overall economic recovery.
Meanwhile, the Bank of England has left policy unchanged at their meeting yesterday. Whilst the committee voted unanimously to maintain interest rates at 0.1%, there was also a majority vote of 7-2 to continue with the programme of purchasing £200 billion of UK government bonds and non-financial investment grade corporate bonds. The two members who dissented were actually looking to increase the purchases by an additional £100 billion. A reminder that central bank policy around the world is still firmly in supportive mode.
The World In A Week - The End Of The Beginning
Boris Johnson returned to no. 10 in full capacity last week after successfully defeating the coronavirus. Boris returns to a torn party, split by those in favour of easing lockdown restrictions and those that believe lockdown restrictions should remain in place for longer. Clarity was provided as the week progressed with indications that lockdown measures will be eased, although to what extent, is currently unknown. Boris has promised to outline a ‘comprehensive’ plan of how we will move out of lockdown on Thursday; media speculation is already underway with the primary focus on allowing individuals to choose up to 10 people to include in their social circle.
In a further blow to income investors, UK dividend cuts continued to gather pace. FTSE 100 constituent, Shell, stunned investors by cutting its quarterly dividend by 66% following the collapse in global oil demand and the virus pandemic. The UK dividend market is a key component in global equity income portfolios and given the pace of dividend cuts across the UK market, will put global equity income managers under pressure, with many expected to miss their yield objectives. Income has been a key area of focus for the Investment team and we are finding other areas of opportunity. Asia, an area not typically associated with income, has proved an interesting hunting ground, the region has a lower payout ratio but fewer dividend cuts are expected. Infrastructure is also another area of interest; the sector typically yields between 4-5% and is expected to provide an element of protection in a downturn.
In Europe, the ECB made no changes to interest rates last Thursday but emphasised they remain poised to increase stimulus if needed. The eurozone is expected to be one of the areas hardest hit and will likely suffer a deep recession. While the ECB has confirmed it will do ‘whatever it takes’ to support the euro area, should the current daily pace at which the ECB is buying government bonds continue, the program will reach its limit in October. Last month, the ECB reduced costs for commercial banks to support lending activity and last week, said it would reduce these interest rates further to -1% - effectively paying them to borrow money. Data in the region published on the same day, revealed that the economy had contracted by 3.8% in the first quarter, an all-time low since records began in 1995.
Bank Of England Interest Rate Cut: What Does It Mean For Finances?
Over the last few months, speculation that the Bank of England would increase its base interest rate has been mounting. However, the impact of Covid-19 has changed that, leading to the central bank making two cuts to the interest rate in quick succession.
Coinciding with the 2020 Budget, the base rate was cut from 0.75%, where it’s been since August 2018, to 0.25% on Wednesday 11th March. Just a week later, the rate was cut again on Thursday 19th March to just 0.1%. The latest cut represents a historic low, and it could have an impact on your finances.
The Bank of England base rate is the official borrowing rate of the central bank, affecting what it charges other banks and lenders when they borrow money. This then has a knock-on effect on personal finances.
Why has the Bank of England cut interest rates?
The rate cuts have been in direct response to the coronavirus pandemic.
As the virus has spread globally, it’s had a significant impact on economies. In the UK, non-key workers have been urged to work from home, pubs and other leisure facilities have been temporarily ordered to close, and many other businesses have taken the decisions to either reduce operations or suspend them. These are steps that are hoped to stem the spread and relieve pressure on the healthcare system but come at an economic cost.
The latest interest rate cut has increased its quantitative easing stimulus package and pumped more money into the UK economy. The aim of this is to calm the financial markets, which have experienced volatility over the last few weeks, and stabilise the economy.
In a statement, the Bank of England said: “Over recent days, and in common with a number of other advanced economy bond markets, conditions in the UK gilt markets have deteriorated as investors sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves. As a consequence, the UK and global financial conditions have tightened.”
The Monetary Policy Committee, which is responsible for setting the base rate, voted unanimously to increase the Bank of England’s holding of UK government bonds and sterling non-financial-grade corporate bonds by £200 billion, bringing the total to £645 billion.
But what does this mean for your finances? The impact will depend on whether you’re looking at borrowing or saving.
Borrowers
For some borrowers, the lower interest rate is good news. This is due to the cut lowering the cost of borrowing.
The area where you’re likely to see the most immediate impact is your mortgage if you have a tracker or variable rate one. A tracker mortgage, for example, tracks the Bank of England base rate, so your mortgage repayments should drop before your next payment. A variable mortgage tracks your lender’s interest rate, this will follow the trend of the Bank of England, and most borrowers will benefit from the full 0.65% drop, but it does vary. It’s worth checking with your lender about how your mortgage repayments will change if they haven’t already contacted you.
Unfortunately, those with a fixed-rate mortgage won’t benefit from the rate cut.
Savers
The years since the financial crisis have been difficult for savers. Low-interest rates over the last decade have meant savings aren’t working as hard as they may have done before 2008.
Interest rates on savings accounts are now likely to fall even further. When you factor in the pace of inflation, this means that many savings are likely to be losing value in real terms. This has a particular effect if you’re saving for medium and long-term goals. Inflation rising by a couple of percentage points each year can have a large impact when you assess the impact over ten or 20 years, for instance.
If you have a fixed-rate account, your interest rate and savings will be protected for the time being. However, if you have savings in other types of accounts, it’s likely the amount they earn will fall eventually. Banks must give existing customers at least two months’ notice of a cut, for current accounts and instant-access savings accounts.
For long-term saving goals, investing can help savings match the pace of inflation, maintaining your spending power. However, it’s important to note that investment values can fall and experience volatility, with the pandemic having an impact on markets too. As a result, it’s important to assess your financial goals and risk profile before making any investment decisions.
If you’re unsure what the base rate change means for you, please contact us. We’re here to help you adjust financial plans and goals as circumstances change, whether they’re within your control or not.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.