28 April 2020
The many social implications of lockdown continued to be felt across the globe last week – Thursday should have been the day that Turkey celebrated the 100th anniversary of the founding of their parliament, while us Brits celebrated William Shakespeare’s birthday alongside St. George’s day. Interestingly, St. George wasn’t from England but from Turkey, where he eventually died in the year 303.
There may not be any more dragons to kill these days (aside from metaphorical ones, perhaps) but myths still abound in plenty. At a press conference last Thursday, Donald Trump made the suggestion that COVID-19 carriers be injected with disinfectant, as well as trialling the targeted use of ultraviolet light. And despite the best efforts of common sense, 5G masts continue to be the subject of rumours, leading to the vandalism of several in the UK including one relied upon by the Nightingale Hospital in London.
But who needs myths when the facts themselves are so extraordinary?
Oil is facing perilous times, with lockdown measures not only cutting immediate consumption but pushing reserves to full capacity. The price of a single oil barrel fell to a shocking -$36.73 (on the futures market) and, as a result, there may well be a time lag on oil sector recovery even after markets recover. On a more positive note, both Shell and BP recovered and ended up for the week, cutting back the FTSE 100’s losses for the period.
The lockdown has also provided extra incentive for companies, governments and civil services alike to become less reliant on commuting and business trips – indeed, several cities are using the lockdown as an opportunity to pedestrianize their centres. Will they simply return to the old norms after a lockdown lift? And will the investing world put more emphasis on environmental, social and corporate governance (ESG) factors post-lockdown?
“The market correction has meant investors with a bias towards ESG have benefitted, as companies with good ESG credentials tend to be higher quality,” said Johanna Kyrkland of Schroders. “But it’s a long-term trend that we expect to remain in place.”
For now, the broader economy is in focus. While the oil price used to be called the most important number in the world, the Feds fund rate is a figure more closely watched these days. The centrality of oil to the global economy remains, however, and begs the question of whether there is a risk of financial contagion and if falling prices will bring down the broader market.
“I am not so worried about the risk of contagion,” said Howard Marks of Oaktree Capital, co-manager of the St. James’s Place International Corporate Bond fund. “Some market commentators are suggesting that the collapse of the oil price is a terrible problem for the economy. I don’t see it that way. If you think about it, it’s a zero-sum game, with winners and losers. Clearly, it is a major problem for the oil industry and those that are tied to it. But, ultimately, the lower price of oil is great news for consumers of oil. Airlines and cruise operators don’t have much to smile about right now, but it’s positive for them. And a lower price of fuel means consumers everywhere will have more money to spend on other things. I don’t see the problems in the energy sector spreading elsewhere.”
Has Georgia gone rogue?
Held down by the oil news, the S&P 500 had a marginally negative week – it’s still waiting on the bigger test however, when tech’s ‘big five’ (which account for 20% of the index) will report results. Unfortunately, it was more grim news from other indicators, including the news that a further 4.4 million Americans sought unemployment benefits last week. This brings the total claims for the past five weeks to more than 26 million. And the US labour market will not be able to turn to immigrant workers for the time being either, following the president’s immigration ban declared last week.
It has yet to fall to the lows reached during the global financial crisis, but Bloomberg’s weekly consumer sentiment index for the US has continued to decline; particularly ugly were the US services sector indicators. And even if lockdown were to end today, surveys have shown that just 48% of respondents would return to public places, including factories and offices. But this wasn’t enough to prevent the governor of Georgia from ending the lockdown, announcing that the state would open up once again.
A ‘race against time’
Here in the UK, the CBI has warned that it’s a ‘race against time’ to prevent firms collapsing, with indicators showing UK factory sentiment at its lowest since records began in 1958; manufacturing PMIs also sunk to their lowest since records started 28 years ago. Services PMIs were, sadly, even worse – dropping from 34.5 (where 50 indicates no change) to a meagre 12.3. And a new low was reached by the Composite PMI with 12.9 in April, even lower than the eurozone (13.5).
“On past form, the UK PMI survey is consistent with GDP contracting by at least 6% month-on-month in April, far sharper than any of the monthly falls seen during the global financial crisis,” said Ruth Gregory, Senior UK Economist at Capital Economics. “The PMIs…do not cover the retail sector. We think that the actual fall in GDP in April may be nearer to 20% month on month and that for as long as the lockdown is in place, output will be about 25% below its normal level.”
The challenge is political as well as economic in the eurozone, with the virus throwing an integrated European economic system into increasing doubt, at least as far as borders markets are concerned. Particularly in the agricultural industry, labour has been reorganised since the virus and now looks largely to locals. Will it ever revert?
While China is further through the course of the virus, there is still plenty of recovering to be done, not least in the financial markets. International investors sold some $29 billion of Chinese equities in March.
Their behaviour throughout the crisis, as well as conditions in its food markets, faces increasingly loud criticism from foreign governments. Last week, the US State Department criticised Beijing for increasingly assertive and aggressive regional policies during the outbreak ¬– actions include more naval patrols in contested areas and fresh arrests (last week) of democracy activists in Hong Kong. This included virus policies too, where at one recent WHO meeting, Chinese representatives refused to allow Taiwanese representatives to describe Taiwan’s experience of the virus, on the basis that Beijing speaks for Taiwan.
The main focus of the communist party is likely to be popularity at the moment. Beijing is certainly pushing to persuade people back into public spaces, as well as to spend money, while Communist Party officials were being ordered to make themselves seen out and about shopping.