12 May 2020
During the early days and weeks of the virus outbreak, many governments worldwide enjoyed a surge in popularity – the need to rally behind leaders benefitted incumbent politicians. From the UK government seeing its best popularity in decades to Italy’s prime minister’s stunning 71% approval, it was Angela Merkel’s 79% that bested them all. Of course, this may reflect European Central Bank policies along with domestic policies, although ECB bond-buying plans face a new hurdle, as of last week.
“Under the leadership of Christine Lagarde, the European Central Bank has been much bolder and has moved much faster than we have seen in prior crises,” said Michael Power of Ninety One (formerly Investec). “However, Germany’s constitutional court has thrown a spanner in the works by referring the ECB’s planned bond-buying activities to the European Court of Justice. These are extremely serious matters for the eurozone. If they are not resolved in a way which allows the ECB’s stimulus to proceed, I believe an Italian exit from the block becomes a higher probability.”
EU sales suffered their largest monthly dip on record – 11.2% lower in March than February, and the Euro STOXX 50 had a bad week. The EU also faced pressure from the US and Australia to support the launch of an independent inquiry into the origins of COVID-19. Last week, it became clear how far US-China relationships had deteriorated in recent weeks as Mike Pompeo, the US secretary of state, claimed there is significant evidence linking the virus’s outbreak to a government lab in Wuhan. US officials said on Friday that trade talks continue.
The Whitehouse has no shortage of worries at the moment, after a US payrolls report last Friday showed the loss of 20.5 million jobs in April – this came after the ADP private sector report showed that nearly a decade of jobs gains had been wiped out in less than two months.
While the pandemic has cut across global supply chains and knocked customer spending, the US trade deficit has suffered accordingly, widening by 11.6% in March. And as global trade continues to deteriorate, exports have reached their lowest level since November 2016. US Purchasing Managers’ Indices for both manufacturing and services were far down in the mid-20s (where 50 indicates no change), while consensus forecasts now point to a U-shaped, rather than V-shaped, US recovery. All this is likely to have implications for the president’s ratings, and therefore his electoral prospects.
“The slow recovery will make it much harder for Trump to win a second term in office, which is one of the reasons he is pushing for an early re-opening of the US economy,” said Power. “Meanwhile, anti-China rhetoric is rising. This appears ill-advised, because the US imports a substantial proportion of its medical equipment from China.”
A huge spike in borrowing is expected from the US Treasury, with the government likely to raise $4.5 trillion this fiscal year. Of course, this will also affect markets and as things stand, bonds and equities look to be headed in opposite directions. Bond investors may be worrying about debt levels, but equity investors are hoping for growth. The S&P 500 rose significantly last week.
In comparison to Brazil however, Trump’s prospects are bright; Jair Bolsonaro saw his ratings drop to the lowest of his presidency last week, with just 27% saying he’s doing a good or great job, and 49% saying he’s doing a terrible job. Last week as well, a forecast from Société Générale suggests Brazil’s economy will contract 7.4% in 2020.
The Bovespa, Brazil’s leading stock index, is down more than 30% for the year, however this reflects a broader Latin American story; mixed results on virus containment and plunging commodity prices weigh on sentiment.
As much as you can still include China in the ‘emerging markets’ bracket, it is proving an exception to falls across the board. While the services sector contracted (on a monthly basis) further in April, the rate of that contraction has slowed since March. Meanwhile, exports increased, and trade surplus climbed last month. However, a fall in revenue means the fiscal deficit likely ballooned in April; the CSI 300 rose last week, but there are now signs of a second spike in virus cases in China.
“Sentiment in China is actually pretty good – the Shanghai market is only down 9% in US dollars year to date, partly because it was the first country in and will be first out,” said Alistair Thompson of FSSA, manager of the St. James’s Place Asia Pacific fund. “Interest in autos is strong, probably because social distancing is expected to be around for some time, so people are avoiding public transport. And the supply side looks like it’s back on its feet, although the demand side is much more questionable, when most of the world is still in lockdown. If borders don’t open, trade and business will be limited for some time. But we’ve always preferred consumer staples because the sector is less volatile and cyclical.”
In the UK, early trading this week showed investors responding positively on the FTSE 100 after Sunday’s confirmed (mild) easing of lockdown measures. The Monetary Policy Committee also implied that more quantitative easing is to come, and with Brexit firmly out of the public eye, trade talks with the US were formally launched and reportedly began on good terms. The government has also been testing a contact-tracing app on the Isle of Wight.
The Bank of England offered plenty to ruminate on, however, when it forecast that the UK was due to suffer its worst recession in 300 years.