I hope that you have enjoyed the glorious sunshine at the weekend. If you are anything like me, sunshine brings a greater sense of positivity. Financial markets have also been feeling positive with a strong start to the week in almost every asset class.
The narrative remains much the same; hopes over revival of economic activity, a vaccine and yet more stimulus from central banks. Last time I discussed the potential for negative interest rates in the UK and US, whose Government is showing growing support for a fifth support package in the form of a tax credit to help keep workers on payrolls.
In the United States, the financial support offered by the Federal Reserve combined with all fifty states now having started reopening appears to have stabilised consumer confidence which has risen, very slightly, from April to May:
There are also signs that global air travel is picking up. After collapsing by 71% between mid-February and early April, global flight numbers are once again increasing, rising 162% between April 12 and May 21:
However, this improvement overstates the pick-up in the number of passengers as flights are running at a much-reduced capacity relative to the pre-COVID-19 environment. Nonetheless, the noticeable inflection suggests that the global economy has started its difficult recovery process and that the worst of the economic deceleration is behind us.
So, does this mean that we should expect economic and financial smooth sailing from here? Whilst the data flow is turning more positive, there are still numerous potential risks which we need to be aware of.
Any short-term forecasts are highly speculative because so much depends on the path of infections. At the bullish end of the spectrum, perhaps the rate of infection will continue to ease in most major countries and a vaccine will become widely available before the end of the year.
At the other extreme, the rate of infection could spike back up as economies reopen, leading to a more virulent second wave later this year. And if you want to be really bearish, the virus may mutate, preventing the development of an effective vaccine. After all, there is no vaccine against the common cold and the vaccine for the regular flu has not eradicated that virus.
Opinions about the outlook are all over the map and the sad truth is that nobody really knows what will happen. It all underscores the huge challenges facing governments as they try to judge the appropriate pace of restarting economies, opening schools, and relaxing social interactions.
On top of Covid-19 and its various implications, tensions between the US and China are flaring up again over the handling of the outbreak and, more recently, Beijing’s efforts to impose a new national security law on Hong Kong. Speaking to reporters President Trump said the US is working on a “strong response” and that he would announce something in the next couple of days. Thus far, Trump’s weapon of choice has been trade tariffs, arguably a blunt tool. The efficacy of tariffs is highly suspect as they mean higher import costs, inflation, and restricted supply chains. Whilst Trump has successfully marketed himself as a businessman and deal maker, his trade policies so far are likely to have been detrimental to the livelihoods of his key voters.
Should Trump decide to renege on the trade agreement with China, which came into effect at the beginning of the year, or impose new tariffs, markets may react poorly as this would compound the pressure on global supply chains and trade.
As always, we firmly believe that proper portfolio construction, ensuring adequate diversification amongst asset classes, is the best form of defence in these highly uncertain times. Until next week, stay well.