Will it ever stop?
As we head towards the end of another week, we are still in a land of volatile markets with an uncomfortable downwards trend. We hope we can shed some light on the causes and also highlight some of the positive reasons why we feel things will start to improve.
What is wrong with the markets?
We are moving to the next phase, where company news is starting to emerge and almost all of it is bad. Retailers are starting to report their depressed level of sales over the last few weeks, we have companies making provisions for those lost sales, some companies are simply saying they cannot predict the impact whilst others have concerns about servicing debt and a number have cut or suspended dividends.
We have seen Laura Ashley go into administration, Carphone Warehouse closing 531 stores and talk of massive layoffs in travel, tourism and leisure sectors despite promises of Government help.
With no rays of light from companies, there is little to break the spell of gloom, but we believe it is always darkest before the dawn and for those with a steady nerve, the markets will stabilise sooner rather than later.
Didn’t the promise of massive spending packages from governments help?
Many governments have promised to start to cut costs for businesses, protect mortgage payers and ensure that economic recovery will be as fast as possible. Whilst the headline numbers look good, the fact is that without the rate of infection coming under control and a return to normality, there is little governments can do financially to steady people’s nerves.
The markets also want to see more detail about how the spending will be structured and whom it will assist. Like us all, markets have a view that announcing a spending package is much easier than implementing it and ensuring those who need help get it. Some experts have even suggested helicopter money, where every employee or citizen gets a set amount of cash.
All eyes are on the FTSE and Stock Market, but what is happening elsewhere?
There are three markets which are worth mentioning.
Oil prices, which fell after Russia decided not to continue to work with OPEC, have continued to weaken. The view is global demand will be significantly lower both in the short term, as the shut down in Europe takes effect, and then in the long term as airlines and other users recover. A cut in the cost of motoring will no doubt help boost the economy, but we would expect some recovery in the oil price once the global economy starts to exit lock down.
Government bonds are a good measure of the risk involved and the market’s view on individual countries. Initially, the UK enjoyed strong support as investors sought lower risk assets, but this sentiment has become more negative in recent days. The same has occurred in Italy and Spain, but the announcement of a large bond buying system from the European Central Bank has supported the market.
Currencies also provide a good indication, and Sterling initially fell in a steady way against the likes of the Yen, Euro and US Dollar, but in the last two days has started to dive. The good news is, this has helped UK investors, by reducing the losses on their overseas holdings where the currency risk was not hedged.
Why is the UK being viewed so poorly?
There as number of reasons. Firstly, the Brexit factor, which has resulted in UK being seen as a riskier place to invest. Whilst Brexit has occurred, we still need to establish how the UK and Europe will exist after the transition period, which is due to expire at the end of 2020. The second issue for many investors is the concern over the UK’s reaction to the virus. The UK government had the benefit of being behind the curve on the infection rate compared to China, Japan, Italy and Spain, but rather than learning lessons from Europe and Asia on how best to contain the spread, they seem to have stumbled and not taken clear, timely and decisive actions.
How about other countries?
The markets at this time would like to see strong and clear leadership, taking decisions based upon facts and advice from experts. However, after the wave of popularism, the view is that too many world leaders have failed to become the heroes of the hour, when their countries and the world needed them to lead. This only adds to the high degree of uncertainty, but eventually they seem to be taking the action required.
Any good news?
Yes, lots of positive news is emerging from Asia, with Japan and China seeming to have controlled the virus with the level of infections falling and in recent days have been zero. The Chinese economy is starting to return to normal and this alone helps improve market sentiment.
On the medical front, there is progress with development of technologies for testing, treatment and vaccinations that seems to be progressing faster than expected.
What do we expect next?
There will be more shocks and volatility in the markets, especially as we expect North America to also start to impose lockdowns to contain the virus. However, like the sun rising in the east and slowly spreading westwards, we expect the number of cases and deaths to start to fall across Europe as controls start to take effect.
Once we start to see the true impact on economies, governments will be in a better position to mend and support their economies, and this will help steady markets.