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30 November 2020

Markets React to Key Global Announcements

The FTSE 100 made a minimal gain of 0.18% last week following a sobering UK economic forecast from Chancellor Rishi Sunak and the introduction of a new tier system which will follow once the national lockdown ends. On the other hand, the US S&P 500 added 1.97% as mixed US data and the possibility of a smooth transition of power boosted sentiment.

According to the Chancellor, the ‘economic emergency’ caused by the pandemic has only just begun as he warned the crisis would cause lasting damage to growth and jobs. Official forecasts now expect the biggest economic decline in 300 years, as the UK economy is predicted to contract by 11.3% this year and not return to pre-pandemic levels until the end of 2022. The Office for Budget Responsibility (OBR) now expects the number of unemployed people to surge to 2.6m by the middle of next year, driving the unemployment rate to 7.5%, its highest level since the financial crisis in 2009. On the other hand, the National Living Wage will rise by 2.2% to £8.91 an hour, with the rate extended for those aged 23 and over. The UK has also ditched its policy of spending 0.7% of national income on overseas aid in order to help with the Coronavirus crisis at home. Overall, the long-term impact will cause the economy to be 3% smaller in 2025 than what was initially expected in the March budget.

Government borrowing soared in October as the UK continued to support the economy during the pandemic. According to the Office for National Statistics, borrowing reached £22.3bn last month, the highest October figure since monthly records began, highlighting the significant effect the pandemic is having on public finances. However, the figure was not as high as some economists had forecast. Since the beginning of the financial year in April, government borrowing has reached £214.9bn, £169.1bn more than a year ago. The OBR has estimated that it could hit £372.2bn by the end of the financial year in March. The increase in borrowing has led to the sharp rise in the national debt, which now stands at £2.08tn, larger than the size of the entire economy. The UK’s overall debt has now reached 100.08% of gross domestic product; an alarmingly high level not reached since the early 1960s.

US President-elect Joe Biden is expected to name Janet Yellen to lead the Treasury Department. If confirmed by the Senate, she would be the first woman to hold the position in US history. The economist had previously served as head of America’s central bank and as a top economic adviser to former President Bill Clinton. As chair of the US Federal Reserve, Ms Yellen was known for focusing more attention on the impact of the bank’s policies on workers and the costs of America’s increasing inequality. She is now likely to focus her efforts on the Biden administration’s economic response to the pandemic, which has caused the worst economic contraction the US has seen in decades. With Ms Yellen’s focus on employment, rather than inflation, she has gained a reputation of favouring low interest rates, which drive economic activity by making it less expensive to borrow money.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Markets React to Key Global Announcements
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