Macro Update - 04 May 2020

Life after lockdowns

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions

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Risk Disclaimer 

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Life after lockdowns: in his weekly Macro Update, Steven Bell discusses how countries are starting to ease their way out of lockdowns, and why there may be a second buying opportunity in equity markets

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

 

Last week was another big week for news: Boris back in charge, US earnings reports, the US Federal Reserve and European Central Banks held meetings, and Shell slashed its dividend.

An even bigger news-filled week lies ahead, with more earnings reports, the Bank of England’s Inflation Report, which will include shocking details on just how bad they believe the recession will be, and on Friday, the US unemployment claims – likely to push past 20 million. But the bigger news is on the countries easing their lockdowns – how is this being done and are the strategies proving successful?

 

Easings are underway: but will they be successful?

Politicians across Europe and the United States are facing massive decisions, trading off the immediate need to limit the damage to their economies against the risk of generating a second wave of virus infections, which could ultimately plunge their nations into disastrous second lockdowns.

News on the virus has been consistent for several weeks, growth in both new cases and fatalities is slowing, and there has been positive progress in terms of drug trials. Against this background, lockdowns are being eased, partially and gradually. Restaurants in Italy are only now being allowed to offer takeaways, and Spanish children were allowed out last week. The much feared second wave of infections has not materialised in China or South Korea, but Europe is starting to ease its lockdowns at a stage when new cases are much higher than they were in China or South Korea. And three states easing their lockdowns in the US, Alabama, Georgia and Texas, are a long way from the degree of virus control that leading scientists believe is the safe threshold. The success of these easings will be keenly watched, and pressure will mount on the governments of those nations still firmly in lockdown and whose economies are being damaged.

 

The UK can learn from other countries, but pressure is mounting

Boris Johnson is set to outline how the UK plans to begin easing the lockdown. Having inexplicably abandoned mass testing and tracing in March, both are now being hugely ramped up. The biggest barrier remains the shortage of PPE, and the worry that when the private sector does begin to move away from remote working, it will outbid care homes and the NHS for PPE. Meanwhile, economists continue to revise down their estimates of current economic activity and are generally flattening the pace of recovery. I still think they’re too optimistic about the depth of the recession.

 

A second chance to buy

I have previously discussed at length how markets have been driven by technical factors, both the extreme bear market by forced selling, and then the subsequent rally by rebalancing flows – estimated at $2 trillion. It can be argued that this has pushed equity markets up too far, and the rebalancing flows have now ceased, leaving equity markets looking decidedly wobbly. Trump’s recent negative rhetoric on China providing another headwind for markets. I believe that overall, economic activity will recover, and so will corporate earnings, but equity markets could dip further before they trend higher again. 

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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