UK Market sees continued volatility

Last week again saw UK markets show signs of volatility, while US markets continued to hit new record highs. The FTSE 100 shed 2.57% as investor sentiment was discouraged by increasing cases of Coronavirus across Europe. In contrast, the S&P 500 gained 2% as investors remained optimistic on a COVID-19 vaccine and a fiscal stimulus package.

UK businesses which use the government’s Coronavirus furlough scheme will now have to contribute to workers’ wages. Since March, the government’s Job Retention Scheme has paid 80% of the wages of workers placed on leave as a result of the pandemic. However, employers will now have to pay 10% of wages, with the government contributing 70%. In October, the government will only pay 60%, with employers having to contribute 20%. The scheme is to finish at the end of October, with Chancellor Rishi Sunak repeatedly ruling out an extension in order to avoid people being trapped in a situation where there was no realistic prospect of them having a job to return to. The increasing cost of the scheme poses further problems for employers, who will face difficult decisions about whether to make staff redundant. The Federation of Small Businesses stated that over one million small employers across the UK have used the furlough scheme, with 23% of them considering reducing staff numbers in the next three months. With 60% of employees in the private sector working for small businesses, there are major concerns that mass unemployment could spread across the country.

Meanwhile, house prices continued to reverse the losses recorded in May and June as they rose by 2% last month, taking the average price to £224,123. Nationwide said that the recovery in the housing market had been “unexpectedly rapid”, as the rise in August was the highest since February 2004. As a result, annual house price growth has now accelerated to 3.7%, from 1.5% in July, driven primarily by the Chancellor’s announcement on the temporary suspension of stamp duty, but also because of pent-up demand carried over from economic lockdowns. “Behavioural shifts” have also caused further activity, as people reassess their housing needs after lockdown; a garden and space to roam sounds all-the-more appealing after being stuck inside for a quarter of the year. Nevertheless, as lenders tighten their criteria for offering loans, many may struggle to secure a mortgage. Anyone who cannot offer a large deposit or whose job is at risk because of the virus is likely to find it harder to get a loan than before the pandemic, putting a potential ceiling on the boom.

Elsewhere, as President Donald Trump’s administration urged US states to get ready to distribute a potential COVID-19 vaccine by the beginning of November, the S&P 500 climbed to record highs.

US Treasury Secretary Steven Mnuchin stated that Republicans will soon reveal a new spending bill which will support the country’s Coronavirus-damaged economy amid an ongoing stalemate with Democratic lawmakers. The White House and Congress have been in a deadlock for weeks over a potential substitute for the US$2.2tn Cares Act, which was initially passed at the beginning of the pandemic. The Act included key provisions such as extra jobless payments and aid to small businesses, however, this expired at the end of July. President Donald Trump’s administration has obstructed proposals from Democrats, who in May passed a US£3tn spending package in the House of Representatives but struggled in the Republican-controlled Senate. The Administration is now looking to spend around US$1tn on the new bill.

China’s manufacturing industry made a recovery in August, driven by the sharpest increases in output and new orders since the start of 2011. The headline seasonally-adjusted Purchasing Managers’ Index (PMI) rose to 53.1 in August, from 52.8 in July, according to Caixin. Total new work expanded at the fastest rate amid reports of stronger client demand, as the global and domestic economy continued to recover from the pandemic. Furthermore, employment has started to stabilise as job cuts in the manufacturing sector continue to fall.

Similarly, the downturn of Japan’s manufacturing industry eased, although the sector continues to be damaged by the pandemic. The headline au Jibun Bank PMI rose from 45.2 in July to 47.2 in August, the highest figure since February. The softening of lockdown measures contributed to a slowdown in output and sales declines, however, the pandemic currently continues to heavily impact demand and work schedules.

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