Covid 19 Market Update

‘Lockdown 2’ signalled further trouble for the UK markets and we expect this will continue in the weeks ahead with uncertainty around Brexit. However, markets around the world performed quite well over the past week as we saw Joe Biden’s lead increase. Markets had uncertainty.

Whilst, Joe Biden has been announced as President Elect, it is difficult to see that Mr Trump could sustain a successful challenge. He has failed to present any clear evidence.

Naturally, many will ponder the longer-term implications of the extraordinary events of 2020. Conventional economic theory tells us that all this debt must be repaid, implying a decade of heavy taxation and constrained government spending. Modern Monetary Theory suggests that government debt can be rolled over with freshly issue money. This implies that borrowing can be parked indefinitely and therefore avoid decades of austerity for future generations.

A Biden Government

  • A Centrist Democratic President
  • The US to re-join WHO and the Paris accords
  • The US/UK trade deal will be a lower priority
  • Many Trump policies reversed
  • Stricter lockdowns and protective measures
  • Adopt a different approach with China

A battle still remains for control of the Senate. Currently controlled by the Republicans and therefore Biden’s wish list hangs on this result.

Markets have been very happy that US companies may not be hit with tax increases (a Republican Senate will prevent this), while the US central bank may have to provide even more support. The US fiscal stimulus package should hopefully now be approved providing an economic boost. On a global basis the US will deliver lower growth and the eyes of the world are looking to Asia and China specifically.

Returning closer to home. UK markets underperformed substantially during October, coinciding with Chancellor Rishi Sunak’s worries over how to pay for the government’s largesse.

The past weekend’s imposition of a month’s lockdown was well-received by markets. Rishi Sunak and Bank of England Governor Andrew Bailey must have encountered the Ghost of Christmas Yet to Come. The debt caused by the extension of worker and business support was funded in its entirety by the “issuance of reserves” to buy more of the UK’s government debt issuance – namely Gilts.

Lockdown 2.0 – at what cost?

What the government was keen to prevent still came as hardly much of a surprise, given rapidly rising hospital admission numbers. The 4-week lockdown will mean things will get tough in a number of sectors. According to the Bloomberg Activity Tracker, life in Britain was already slowing down as the regionally tiered restrictions came into force. Naturally, a second lock-down will cause a significant drop in economic activity. The National Institute of Economic and Social Research expects a relatively small 3.3% drop.

They key question is whether businesses and consumers can last long enough to rebound strongly on the back of their pent-up demand when restrictions are lifted.

Boris has mentioned on several occasions that England will move to a tier system after 2nd of December, this depend on the data and SAGE.

Rishi Sunak’s extension of the furlough scheme is a much-needed relief. In the revised furlough scheme, 80% of wages up to £2,500 will be covered – as well as up to £7,500 in trading profits for the self-employed – while even those made redundant after 23 September are able to be rehired and put straight onto furlough. The scheme is available until March.

The markets view sectors such as construction, manufacturing, financial services and healthcare as key indicators that drive the economy. Whilst restaurants and bars closing make the headlines, the key sectors are in good shape.

Short term volatility is expected and whilst restrictions are relatively limited to Europe and the UK. Asia and the US are not in the same situation. Governments will continue to provide huge fiscal and monetary support.

Please note: Data is sourced from third party sources and does not represent the views of Craufurd Hale Wealth Management. The above does not constitute as advice and is only valid at the publication of this date.