New article from Tatton Investment Management: V-shaped recovery for Valentine

17 February 2020

While investors enjoyed another upbeat week, the world’s medical profession (and the wider public at large) remained in a more troubled state, with concerns increasing after the World Health Organisation officially renamed this strain of the Coronavirus to Covid-19.

Last week, we wrote how capital markets had recovered from the late January sell-off, seemingly unconcerned that pandemic avoidance may devastate the global economy more than the illness itself. This theme continued this week, despite the count of infections and deaths jumping up after the Chinese authorities adjusted their detection method to a more realistic, if slightly less scientific approach.

Many market professionals ascribe market action to a massive monetary liquidity injection by the People’s Bank of China to ease corporate financial stress. The consequence of the unprecedented virus containment actions across the nation has slowed deliveries and therefore payments. The central bank’s response was seen as timely by market bulls, given the US central bank is likely to slow their support of transactional cash levels that started last September. 
On the other hand, beyond the stock markets, there are capital markets areas which have started to price-in a worsening outlook, at least for this current quarter. We wrote last week that the US and UK yield curves had once again inverted at the very short end of bond maturities – which historically has been a sure sign that investors are concerned about the near-term outlook.

The currency markets have also reacted, with the Euro falling back (against the US Dollar) to levels not seen since the 2012 Euro crisis. There was a fair bit of head scratching, because the week also marked the first time Greece’s 10-year government bonds traded at yields below 1% - unlike the Euro crisis when they were at 35%.

The €-Euro’s renewed weakness was more likely caused by concerns about the erstwhile bulwarks of the north. Germany remains highly dependent on Chinese demand. Industrial production data last December showed manufacturers activity levels were at rock bottom and still falling. The obvious concern is; how much worse will it get now - with the added impact of the virus disruptions ‑ before it gets better?

For now, investors appear to be content to look through near-term weakness and foresee a ‘V‑shaped’ recovery for global growth. The predicted recovery is seen as merely suffering a postponement and it may well be that aggressive stimulus delivers an even stronger revival.

Optimism is clearly supported by the plentiful liquidity and welcome for investors, but it is likely predicated on expectations that Covid-19 will be no more disruptive than the 2009 H1N1 Mexican Swine Flu, which according to WHO research affected up to 1.4 billion people worldwide and had an ultimate fatality count in excess of 160,000 (although most of these poor souls would have died from other infections in due course).

Turning to market-influencing politics, Sajid Javid’s resignation, and the perception of a botched cabinet reshuffle, did not knock the £-Sterling. Indeed, it surprised by strengthening sharply, which is good news for Easter holidays overseas although not welcome for UK exporters.

An interpretation of Johnson’s more stratified executive appears to be that deficit spending will be quicker in coming. The domestic demand stimulus would strengthen the economy, pushing the Bank of England into a hawkish stance given their recent assessment that there is no particular spare capacity left in the UK economy.

We are not sure the consequences of the reshuffle had been entirely thought through (beyond the obvious Machiavellian dynamics), but it will most definitely lead to a much more unambiguous accountability of the UK’s head of government and his advisers.

Outside the UK, the jury is out whether the stepping down of the designated successor to Germany’s chancellor Angela Merkel will weaken or strengthen her position. Nevertheless, the shorter-term increase in political uncertainty will have added to the downward pressure on the Euro. In the US, stock markets’ complete ignoring of self-declared ‘socialist’ Bernie Sanders winning the Democrat’s New Hampshire primaries can be interpreted in two ways. Either an expectation that the UK’s general election outcome will repeat in the US with a landslide re-election of Donald Trump in November. Or – less written about – the fact that the candidates of the political centre ground gained far more support in New Hampshire than four years ago, pointing to a higher probability that a moderate like Mike Bloomberg will challenge Donald Trump.

In summary, while there may have not been much in the national headlines about the economy and capital markets, there is plenty to consider at the moment, with the many variables currently far more in flux than we had thought possible at the end of last year.

News Archive

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