In this week’s market update: Shares and oil rise as lockdowns start to ease and gold hits a seven year high as inflation fears return.
Stock markets started this week on the front foot again as investors warmed to suggestions that lockdowns might be eased without a major upsurge in Covid-19 infections and hopes rose of progress in the search for a vaccine. Although it is very early days yet in the hoped-for return to normality, the data so far suggest that the worst of the outbreak may now be in the past.
Stock markets had already retraced more than half of the losses experienced since sentiment soured in February, but they remain a long way off their previous levels so better than expected news still has the potential to push prices higher.
Yesterday, shares around the world rose, with the FTSE 100 4.3% higher after earlier gains in Asia. The US closed more than 3% higher too after Boston-based biotech Moderna said it had achieved good results in human trials of a potential Covid treatment. That good news spilled over into Asian markets on Tuesday, with the Hang Seng up 2% and Japan 1.7% higher.
In Europe, meanwhile, an economic activity indicator from the Bundesbank, which tracks real-time data like road traffic and electricity usage, pointed to a shallower than feared downturn in activity in April for Germany, the engine room of the Eurozone economy. The central bank said ‘a recovery is underway.’
Hopes for a partial return to work in Europe and the US, coupled with continuing central bank and government support have seen shares rise by around a third from their low point. The Federal Reserve said over the weekend that it was by no means out of ammunition, suggesting more stimulus to come, but its chairman Jay Powell added that a full recovery might not be in place until the end of 2021 and could require an effective vaccine before victory could be claimed over the coronavirus.
His comments were nuanced, however, pointing to positive signs of an improvement in the jobs market after the savage job losses in recent weeks. Although the unemployment rate has more than trebled to around 15%, representing millions of new jobless in America, the Fed chair noted that the majority of people have been laid off temporarily (in the US’s highly flexible jobs market) and are likely to return to their jobs when the environment improves.
Commodities like oil and iron ore, a key component of steel, are also responding positively to hopes for a stabilisation of the global economy. The oil price, both the international marker Brent and the US contract WTI are above $30 a barrel, in stark contrast to the negative price a few weeks ago for WTI when traders worried that the US was running out of storage for the oil industry’s excess supply of crude.
The key question is how deep the scars will be from the economic heart attack suffered by the global economy this spring. The rolling impact has been likened to the Fukushima earthquake in Japan in 2011 where that initial shock triggered a tsunami, which in turn caused catastrophe at a nuclear reactor.
The equivalents in the current crisis are the outbreak of Covid-19, leading to mass unemployment once government support measures for companies are withdrawn and then a spate of business failures. This is categorically not what the stock market is currently pricing in as it continues to bet on a V-shaped recovery with little if any long-term damage to the economy.
Unemployment is a key focus for policy makers since massive government intervention, as in the UK’s furlough scheme, has effectively kicked the economic reckoning down the road. This week it emerged that a fifth of UK companies believe they will lay workers off over the next three months. Many businesses say they have only been able to avoid redundancies by imposing pay cuts, stopping hiring, cutting bonuses and taking advantage of the government’s promise to pay 80% of the wages of furloughed staff.
Rishi Sunak, the Chancellor, has extended the furlough scheme until October but the support it provides will start to taper away from August so unemployment is sure to rise over the summer. Andy Haldane, the Bank of England’s chief economist, has forecast a return to 1980s levels of unemployment.
Even those who keep their jobs are likely to be fearful of losing them, which could have a profound impact on consumer behaviour as people make precautionary savings to protect themselves and their family’s if conditions worsen.
Andy Haldane believes that between a third and half of the UK workforce is either unemployed, under-employed or working shorter hours.
Another commodity that has risen sharply in price, for less positive reasons than those driving oil and industrial metals, is gold. Gold is a safe haven for investors worried about financial stability and, in particular, about inflation. The return of damaging price spirals, while not the base case for most investors, is starting to appear more frequently in discussions about the likely long-term impact of coronavirus.
The causes of inflation are complex, but broadly speaking too much money chasing too few goods and services is to blame. With governments and central banks flooding economies with new liquidity, trillions of dollars in America alone, the fear is that short-term disinflation, even deflation, could turn in due course into longer-term inflation.
The need to placate restive electorates, left out by measures implemented after the financial crisis, means governments are likely to open the spending taps on a huge scale this time, to explicitly avoid austerity once the crisis has passed and to keep policy loose for longer than necessary. That is seen as a recipe for a return to spiralling prices.
This is the perfect scenario for investors to seek shelter in gold and the precious metal has seen its price rise to a seven-and-a-half year high of nearly $1,800 an ounce. Funds investing in gold miners have been among the best performers on the stock market in recent weeks.
Later this week, attention will re-focus on China, which has dropped out of the news somewhat as the epicentre of the coronavirus crisis has shifted to Europe and then America.
On Friday, the National People’s Congress reconvenes after the annual meeting of the Chinese Communist Party was postponed in early March. Although largely a rubber-stamp exercise for the leadership in Beijing, all eyes will be on whether the Party sanctions further stimulus of the economy in light of the deteriorating trade relations with the US in recent weeks.
The relationship between China and the US has worsened as the White House seeks to deflect attention away from its handling of the Covid situation ahead of November’s Presidential election. President Trump has threatened the re-imposition of trade tariffs on China, even going so far as to say he was minded to ‘cut off the whole relationship with China’.
And finally, another story that has been out of the headlines for a while has returned in May - the fragility of the pound on the back of gloomy Brexit headlines. Sterling has been one of the worst performing major currencies this month as attention has re-focused on the fraught negotiations between Britain and the EU as we head towards the end of the post-Brexit transition period at the end of the year.
A third round of talks stalled last week and Britain has said it will walk away from negotiations if there is no sign of a path to a deal by June.
The pound, which has fallen to just over $1.20, down 4% against the US currency and 3% lower against the euro, is also under pressure from speculation that the Bank of England may be considering implementing negative interest rates in Britain for the first time. The base rate is currently just 0.1%, its lowest ever.