Markets Lose Out as Coronavirus Cases Rise

James Rowbury, Investment Research Coordinator, Redmayne Bentley
 
Global markets were volatile last week as Coronavirus cases across Europe continued to surge, forcing more countries back into lockdown. The FTSE 100 lost 2.26% as further regions of the UK faced tighter restrictions. The S&P 500, meanwhile, shed 1.1% as investors looked to Washington for updates on fiscal stimulus talks.
 
The Bank of England (BoE) has stated that the UK now faces an “unprecedented level of economic uncertainty” after the British economy shrank by 20% in the three months to June, the biggest fall of any large advanced economy. Andrew Bailey, governor of the BoE, has warned that as Coronavirus restrictions are tightened, there is a significant risk of economic growth continuing to be at lower levels than initially expected. Output for the end of the third quarter is now estimated to be 10% lower than the end of 2019. Mr Bailey also highlighted that in the face of uncertainty, it is best for policymakers to act aggressively, rather than cautiously. Finally, he touched on the ongoing debate over setting negative interest rates, which would bring the cost of borrowing below zero. From past experience, he stated that negative interest rates would probably appear to work better in a wholesale financial market context and in a growing economic upturn. Furthermore, with interest rates already low, it is unclear on how much negative rates would help encourage new activity.

The end of the Eat Out to Help Out scheme pushed UK prices up last month, with the UK’s inflation rate climbing to 0.5% in September, from 0.2% in August. The Consumer Prices Index (CPI) began rising more quickly in September after the discount meals scheme ended, driving up restaurant and café prices. September’s CPI is also used in the calculation of state pensions, state benefits and business rates; state pensions are to increase 2.5%, benefits will rise 0.5% next April and business rates bills for 2021-2022 will increase by £159.42m in England.

The head of the International Monetary Fund (IMF) has expressed concerns over sharp increases in debt levels in poorer countries. Back in April, officials from the G20, or countries with the largest economies, agreed to pause debt repayments and interest payments for the world’s poorest countries until the end of the year. The G20 Debt Service Suspension Initiative has helped 44 countries to defer over £3.8bn of repayments, in order for them to be instead used for tackling the Coronavirus crisis. However, the IMF now believes that urgent action is still needed in the form of restructuring debts as global debt levels are now predicted to reach 100% of gross domestic product in 2021.

In September, US retail sales grew at their fastest pace in three months, despite concerns over a swift economic recovery amid uncertainties about additional stimulus measures. According to the US Department of Commerce, retail sales rose by 1.9% last month, driven by spending on vehicles, clothing and sporting goods. In August, sales had risen at a slower rate than expected, with 0.6% growth. The latest figures offer evidence of the resilience of the American consumer, who has encouraged the recovery of the economy, supported by large doses of fiscal stimulus intended to sustain spending. Although government support had started to fade, US households were still able to boost consumption in September by redirecting spending from travel and entertainment into the goods and retail sector. Although the labour market continues to suffer from millions of job cuts, retail sales have now recovered all the losses made since the start of the pandemic.
 
According to the latest official figures, China’s economy continues to recover from the Coronavirus outbreak, after the world’s second-largest economy reported growth of 4.9% between July and September, compared to the same quarter last year. Although the figure is lower than the 5.2% expected by economists, China is now leading the fight for a global recovery based on its largest gross domestic product data. The near 5% growth is far from the 6.8% slump that the nation’s economy suffered at the start of 2020 when the pandemic first began, forcing nationwide shutdowns of factories and manufacturing plants. Furthermore, China’s trade figures for September also indicated a strong recovery, with exports and imports growing by 9.9% and 13.2%, respectively, compared to September last year.