Chancellor scraps recovery plan in favour of immediate economic measures
Boris Johnson’s latest announcement of tighter Covid restrictions across England is expected to last 6 months, prompting Rishi Sunak to focus on preventing further unemployment and business closures in the more immediate future.
In his August budget the Chancellor had initially intended to map out a long-term plan post-Covid-19 and look to improve the state of public finances, after unprecedented support in the form of the furlough scheme among others. Instead he is looking to bring in more emergency schemes, as the country heads towards a winter ruled by the virus, and expectations of a second lockdown/additional restrictions wreaking further havoc on the economy.
Among these schemes is a ‘wage-support scheme’ whereby the government subsidies the pay of workers, who are only able to work part-time. This looks to replace the furlough scheme ending at the end of October, which cost an estimated £39bn.
Economists have commented that the complete scrapping of the August budget clearly shows that the government are still very much in ‘crisis mode’, and without the new state support to replace the furlough scheme, there would likely be a huge spike in unemployment. A spokesperson from the treasury stated that “The priority is one word: jobs,”
This new wage support scheme is likely to be somewhat effective in avoiding an expected spike in unemployment, allowing many businesses to keep people employed on a part-time basis if their operations have been reduced.
However the scheme has been criticised by many with Unions accusing Mr Sunak of using 'plaster to cover gaping wound' with jobs already lost and calls that the furlough scheme should have been extended past its October deadline.
September decline gains force and drags down European recovery
European Equity markets are now on track for the poorest performing month since the infamous March collapse. There are increasing fears over the true economic impact a second coronavirus wave will have on the continent’s recovery.
Germany, France, Italy and Spain all experienced benchmark index losses as news of increasing Coronavirus cases became more pressing. The travel and leisure sectors across mainland Europe have been the worst hit as they have experienced a full summer holiday season with a lack of business revenues and now face possible further restrictions.
The Bank of Spain has recently announced that it expects the Spanish economy to struggle for far longer than originally predicted. In fact, it predicts that the economy could be almost 6% smaller by the end of 2022 than it was before the pandemic hit.
Strategists at asset manager Threadneedle have indicated that to navigate this volatile market it is important to focus on investments with a competitive advantage and strong products that are in demand. They added that although talks of second waves and Brexit trade talks could make European investors more cautious, there is the potential for significantly gloomier news from the US election in November.
September and October are traditionally months which bring increased volatility in global markets. Stock price volatility has been 25% higher in October on average ever since 1928, according to Goldman Sachs.
There is no unanimously accepted reason why this occurs, with investors moving their money in anticipation of this and the release of many companies earning reports, the most favoured theories.
October this year looks to be no different with, for lack of a better phrase ‘unprecedented times’ meaning there are several factors which may each contribute to market volatility. September has already seen a rise in volatility, with European spikes in Covid cases and further restrictions implemented in various countries. Authorities remain however, reluctant to re-introduce broad lock-downs once again, fearful of the obvious economic implications.
On top of the Covid related volatility, there is also the imminent US election. By now investors have become accustomed to the idea that a single tweet from Donald Trump can drive market volatility in both directions. So much so that the Volfefe Index, named after Trumps infamous ‘Covfefe’ tweet, is an index created by JPMorgan Chase, tracking the impact of Trump’s tweets on the US Bond market.
Meanwhile with the Brexit deadline looming, one-month implied volatility for sterling has hit a five-month high. This measures how much the market forecasts an asset price will move in the future, meaning there is an expectation of higher volatility in UK currency markets in the coming months.
Expectations for a weak pound
The UK currency is expected to remain under pressure as we move into the last quarter of 2020 as it is appearing to be particularly at risk against the Euro. This expectation for a weak British Pound comes as a direct result of an increasing threat of negative interest rates being introduced by the Bank of England and the apparent fragile Brexit trade negotiations which appear to be progressing very slowly as the deadline looms.
There has been a notable deterioration in talks between the EU and the UK as we head towards the fast approaching December Brexit deadline. Such a backdrop has resulted in a steady period of decline for the Pound to Euro and also US Dollar exchange rates.
The UK economic recovery could experience a significant setback as new restrictive measures are announced. The prospect of an imminent end to the UK’s furlough scheme, inevitably resulting in higher unemployment, sets a further challenge for Sterling.
There are usually two sides to a story and a weaker pound is usually well received by UK exporters. Goods fall in price for those purchasing from overseas, directly affecting almost 70 percent of FTSE 100 revenues so when the pound weakens, this particular index tends to outperform.
According to Capital Economics, most analysts are expecting Sterling to experience heightened volatility until at least November when the outcome of a Brexit trade deal will become clearer.
S&P 500 and US Markets experience a bleak September
The S&P 500 has fallen 8.22% since the start of September indicating that at least for now the record-breaking rally in equity markets has begun to reflect rising market risks.
Analysts and investors have been unanimous in their view that huge fiscal stimulus has allowed markets to recover so well since March and without further support, markets will struggle to keep up the momentum seen over the summer months.
There is mounting pressure on congress to find a deal that would see further injections of fiscal support into the economy, however it is looking increasingly unlikely that a deal will be struck before the November election. Without this support US markets are likely to continue their volatile streak going into Q4.
Meanwhile to add to the volatility of US markets there is also the small matter of an election, with comments from both sides causing market movements. Donald Trump has notably refused to commit to a peaceful transfer of power if he loses the election, causing further concern and uncertainty ahead of the election.
Following this he has also stated postal votes are an “out of control” disaster that would skew the result. As a result of concerns over Coronavirus, millions of Americans are to vote through the post, which the President believes will lead to potentially significant voter fraud and threaten his election chances.
Disclaimer: This document represents the opinion of Reeves Independent only and is not intended as advice and no investment decisions should be made solely on the back of this email. Always seek independent financial advice before taking any action. Past performance is not a guide to future performance. All investments carry the risk that you will get back less than you put in.
The Guardian: Pound hit by rising Brexit worries; tech slump drags Nasdaq into correction - as it happened - https://www.theguardian.com/business/live/2020/sep/08/german-exports-trade-stock-markets-growth-halfords-easyjet-business-live
Financial Times: Pound drops after BoE ‘explores’ negative rates - https://www.ft.com/content/1124fbd1-0142-4309-ada8-e1563e64c50d
Financial Times: European stocks fall as September slide gains momentum - https://www.ft.com/content/0c1c831b-5b97-47f5-a1c1-ed7d092372fc
Financial Times: Spain’s economy faces long-lasting pandemic drag, warns central bank -https://www.ft.com/content/53ab7751-56cb-4c19-8855-43065aea6448
Financial Times: Donald Trump refuses to commit to peaceful transfer of power – https://www.ft.com/content/7036d289-a378-4e58-8416-1351c34a8115
The Guardian: Sunak axes budget in scramble for urgent measures to save jobs – https://www.theguardian.com/uk-news/2020/sep/23/sunak-scraps-budget-to-focus-on-getting-uk-through-a-winter-crisis-jobs-economy-covid-19-restrictions-coronavirus
BBC News: US election: Do postal ballots lead to voting fraud? – https://www.bbc.co.uk/news/world-us-canada-53353404