Further lockdown restrictions across the UK
Amid rising numbers of new Covid cases in the UK, Boris Johnson announced a new local lockdown tier system mid-way through October in an attempt to slow the spread. The system determines the severity of restrictions depending on the ‘alert levels’ of a region ranging from medium, high and very high. The government is hopeful this system will be effective in reducing the spread of the virus, while avoiding another full-scale nationwide lockdown which wreaked havoc on the UK economy.
The disparity in lockdown measures and impact on local economy’s across different regions has caused friction with local leaders and the government, with local leaders concerned about the economic impact of further business closures on their region. Greater Manchester has secured a £60 million support package from the government for businesses affected by new coronavirus restrictions after mayor Andy Burnham hit back at the PM for placing Manchester in the higher risk category of tier 3.
Markets have so far reacted negatively to the new measures, with the FTSE posting its first weekly decline in over 3-weeks directly after the announcement of the new system. UK markets are seemingly reacting to each new announcement as it comes with the FTSE dropping each time a new tier 3 region is announced and the movement of London from a tier 1 to tier 2 causing investors to fret.
It remains to be seen whether this tiering system will be effective in slowing the spread of virus, investors are hopeful of some good news coming out of the UK, with the obvious Covid threat and Brexit uncertainty weighing heavy on their minds.
Sterling jumps on back of Brexit news
The pound experienced its biggest rally since March as talks between UK and Brussels showed some promise. Michael Barnier, EU Chief Negotiator, stated that a trade deal was within reach if compromises could be agreed. This announcement alongside the intensive talks the UK has promised allowed for sterling to rally further.
This sparks a signal for potential progress for a turnaround from last month when it was looking increasingly likely that neither side were confident in reaching a deal. This gives the market an increase in confidence that is much needed in the UK. Sterling climbed to the upper end of a tight trading range against the Dollar which continues to experience pressure as the US Presidential elections edge closer.
The Bank of England has also released a comment saying that now is not the correct time for negative interest rates in the UK. Such a move could potentially damage the banking system because of reduced rates of return on investments and large depositors effectively having to pay the bank to hold funds. This news has added to UK market sentiment which is vital as we move towards the end of 2020.
US elections draws closer
With the November election quickly approaching, investors eagerly await some clarity on who will ultimately be in charge in early 2021. Polling data suggests that voting intentions sway in Biden’s favour, however we must not forget how the same was said about Hilary Clinton in the last election and we all know what happened there. We could yet see a further 4 years of Trumps presidency if history repeats itself.
A second term for Trump would mean he is able to consolidate his control over the government. Whilst a Biden clean sweep would likely see an increase in taxes and spending, with sentiment mixed over prospects for the Technology, Energy and Healthcare sectors. However, it is unlikely that we would see the shockwaves and changes some would expect from a Democratic government. Its important to remember that the huge fiscal and monetary stimulus since March has been the main reason why markets have been able to rally against a very bleak economic backdrop.
One of the biggest talking points for investors is whether a further stimulus package can be passed before the November election. With it now looking relatively unlikely, higher volatility is expected, especially in the lead up to the election result.
Why is the second wave appearing less lethal?
Amongst all the doom and gloom surrounding news reporting, there are some positives to be found. Across Europe we have seen spikes in new Covid cases, representing the ‘second wave’ that has worried investors and the general public alike. The chances of recovery have however seemingly improved from the first wave, with cases resulting in hospital stays or even mortality slowing.
Most of this slowing can be attributed to the fact that medical professionals are now better equipped and more experienced in dealing with the virus. According to the Financial Times ‘’Since deaths began rising again in late summer, it has taken one month on average for them to reach one death per million people. In March the same ascent took one week.’’
As well as improved understanding and treatment, younger people make up a higher percentage of Covid cases and they experience lesser symptoms and a much higher recovery rate. This has been seen particularly in Universities across the UK, where the virus has been able to spread quickly around accommodations.
Although we have seen volatility in markets, we haven’t yet seen anything close to what we experienced in late February/March, with historic crashes following rising cases. Although still wary of any further spike in cases.
Its important to remember however that this does by no means mean the virus is under control, and with the colder weather proven to have an effect on the severity of Covid symptoms, we could yet see a surge in cases across Europe thus exposing financial markets to further stress.
Is life in China back to normal?
With a population of 1.4 billion, China now only records around a dozen Covid cases daily. When comparing this to European countries still struggling to contain the virus such as the UK reporting 20,000+ cases daily, there is a stark difference. As such life is back to relative normality in China, with the economy posting growth amidst lockdowns & recessions across Europe.
The IMF predicts the economy will have grown by 2 per cent by the year’s end, representing a V-shaped recovery from the initial impact of the virus, meanwhile most western countries are set to see negative growth rates in the same period with a less sharp recovery projected.
China has been able to recover because they were essentially first in first out of the lockdowns: with previous experience around health scares, their lockdown was brutally effective and has meant they have avoided a second virus wave so far.
This recovery has been driven by Government support for the the manufacturing sector, although lockdowns and recessions across the rest of the world mean exports of certain non-tech goods may be somewhat challenged. China has reported year on year growth in the third quarter, with China’s GDP increasing nearly 5% in Q3 this year.
As well as an economic pick-up, China now has four vaccine products in phase 3 trials, which is the last stage before approval for public use. They hope to gain an advantage on the US and their ‘America first’ policy with any successful vaccine by promising preferential access for countries across Asia, Africa and Latin America to further develop their ‘soft power’ initiative.
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.
BBC News (21st October) Covid: Greater Manchester given £60m support package https://www.bbc.co.uk/news/uk-england-manchester-54628770
Chronicle (12th October) Boris Johnson announces new three-tier lockdown system https://www.chroniclelive.co.uk/news/north-east-news/boris-johnson-announces-new-three-19091094
FT (21st October) Why the second wave of Covid-19 appears to be less lethal https://www.ft.com/content/b3801b63-fbdb-433b-9a46-217405b1109f
Independent (12th October) Winter is coming: Is coronavirus going to get worse? https://www.independent.co.uk/life-style/health-and-families/coronavirus-second-wave-winter-uk-lockdown-boris-johnson-b512355.html
Guardian (19th October) China's economy was first in to Covid crisis – and is first out https://www.theguardian.com/world/2020/oct/19/china-economy-covid-crisis-beijing
FT (19th October) Chinese economy expands 4.9% in third quarter https://www.ft.com/content/22108ddd-3280-4013-bcd8-1adc9e6ae13d
FT UK pound jumps by most since March on Brexit progress https://www.ft.com/content/74079480-2db5-4c3f-b9ae-bae3516dc084