Markets Fall Despite Positive Signs

James Rowbury, Investment Research Coordinator, Redmayne Bentley

Last week’s global markets delivered mixed results with UK Prime Minister Boris Johnson confirming the country is “now seeing a second wave” of Coronavirus cases. Although interest rates have been left at record low levels, the FTSE 100 lost 0.1% over the course of the week due to lower-than-expected inflation rates and poor unemployment numbers. Similarly, the US S&P 500 shed 0.52%, despite the Federal Reserve announcing it will provide further economic support, as a stalemate in Congress over a new fiscal package and the election around the corner are causing uncertainty.

Official figures show that the UK unemployment rate has risen to its highest level for two years, as it grew to 4.1% in the three months to July, compared with the previous 3.9%. Young people were hit the hardest, with those aged 16 to 24 experiencing the largest drop in employment compared with other age groups. As firms prepare themselves for the end of the government’s furlough scheme, workers continue to be removed from payrolls. In the three months to July, there were 156,000 fewer younger people in employment. Since March, around 695,000 UK workers have vanished from the payrolls of British companies.

While UK Chancellor Rishi Sunak is determined to end the Coronavirus Job Retention Scheme in October, Germany is to extend its Kurzarbeit job subsidy measures until the end of 2021. France is also to follow Germany’s example and is now planning to do so for a couple of years. The Kurzarbeit scheme was used during the financial crisis of 2008/09 but can also be implemented by firms undergoing restructuring or suffering from seasonal fluctuations. In the UK, the cost of the furlough scheme is estimated to be £60bn, twice as much as the German’s at €33.5bn and influential figures, including former Prime Minister Gordon Brown, are urging the government to implement a system after October.

Meanwhile, as the effect of the Eat Out to Help Out scheme drove restaurant prices down, the UK’s inflation rate fell to a five-year low of 0.2% in August. In July, the Consumer Prices Index inflation figure was 1%. The prices in cafes and restaurants were 2.6% lower this August compared to the same month last year. The Office for National Statistics stated that the VAT cut in the hospitality sector from 20% to 5% was also a factor which contributed to lower prices. The scheme, which ran from Monday to Wednesdays, offered 50% off food up to a value of £10 per person, as a result, discounts for over 100 million meals were claimed. Following the severe effects of the pandemic on the travel and tourism industry, for the first time since records began, air fares dropped in price in August, as fewer people travelled abroad due to quarantine restrictions. The price of footwear and clothing also fell sharply, despite the release of the new autumn ranges, which would normally increase prices at this time of year.

Overseas, and for the first time since the Coronavirus pandemic began, retail sales in China have grown as the nation promotes domestic spending as part of its recovery. In August, the key indicator of consumer sentiment rose 0.5% year-on-year, beating analysts’ expectations of flat growth. The figure is up from a drop of 1.1% in July and follows a steep plunge of 21% in the period between January and February. Industrial output also strengthened further, as it grew 5.6% from a year ago, once again beating expectations. The new encouraging economic data produced a strong reaction from London-listed miners, who typically rely on China for much of their revenues, driving the index to making some decent gains.

However, the Asian Development Bank (ADB) states that the pandemic has dragged the region’s developing economies into a recession for the first time in 60 years. The ADB announced that the region’s economy is to shrink by 0.7% in 2020, however, it expects a strong rebound in 2021, with growth of 6.8%. Nevertheless, most economies in the Asia and Pacific region are to expect difficulties for the rest of 2020, with South Asia likely to suffer the most. India’s economy is predicted to contract by 9% this year, with a rebound of 8% growth next year. Tourism-dependent island economies, such as Fiji and the Maldives, have taken a severe hit as contractions of 19.5% and 20.5%, respectively, are expected. Nevertheless, the economic threat posed by COVID-19 remains significant and through reoccurring outbreaks and further containment measures, a swift rebound appears unlikely.