Mon 18 May 2020

Equity markets sold off across the board last week, declining initially amid fears of a secondary wave of infections and a pessimistic outlook from the Fed, although there was a sharp recovery later in the week on additional stimulus expectations. In local terms global equities fell -2.5%. However due to Sterling weakness, in part due to by comments from BoE chief economists Andy Haldane that negative rates were “something we’ll need to look at – are looking at – with somewhat greater immediacy”, some regions were positive for UK investors, with Japanese and Emerging Market stocks up +1.5% and +1.4% respectively. US stocks also gained +0.2%, however European stocks fell -1.5% and UK stocks -2.1%. All-in-all in Sterling terms global equities fell -0.1%, with the currency down -2.4% vs the US Dollar, -2.3% vs the Euro and -2.1% vs the Japanese Yen. Energy and Financials were again amongst the worst performing sectors globally, although Financials experienced a strong rally late in the week. Yields were largely flat in the UK (Gilts were down -0.6% for the week) while Treasury yields fell 4bps. Oil rallied c.20% and sits near $30 per barrel. Gold gained +2.4% in US Dollar terms in part propelled by rising inflation fears.

View From the Desk

This week, markets focused on the possibility of negative interest rates in the US. Despite the lack of success of that policy in Europe, investors and the White House welcomed the idea, which would see more liquidity funnelled into risk assets. Never-the-less, after Jay Powell’s vehement denial that he would pursue such a policy, US stocks lost about 2.3% in a volatile week. In other news, UK GDP fell 6% in March and 1.6% for Q1 on an annual basis. The BoE forecasts a 14% loss of output by the end of the year. World CPI data suggests that deflation, rather than inflation, should be a worry, despite supply chain constraints. We also saw evidence of Chinese stimulus being wound back and the return of productivity, but retail trade remained weak. In Germany, some worries have been voiced as COVID-19 R0 (the rate at which someone with the infection infects others) rose above 1, while a resumption of new cases was reported in China and South Korea. Since September, the Federal Reserve and the ECB have announced printing of over $4tn, about half the estimated cost of the crisis (the Asian Development Bank puts it at $8.8tn, or about 10% of global GDP). The size, however, of the stimulus makes little difference if the money is kept in cash. With the risk of a long pandemic, unemployment exploding and business and consumer sentiment sinking, with globalisation retrenching fast, investment appetite has been low, and some policy makers feel that a zero interest rate policy could reinvigorate stocks and bonds. However the experience in Europe has shown banks are reticent to charge clients for deposits and thus take the much of the cost on themselves, which hurts their bottom line, contrary to the intentions of the policy. Despite denials, the matter is now on the table and a stand-off between policy makers and traders could be brewing. We may be out of the previous cycle, but we are certainly not in a new one yet. As markets search for a new overarching positive narrative, we expect more bouts of volatility and believe that diversification is still an investor’s best defence against it.

David Baker, CIO


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