Encouraging numbers for some countries, but the UK still has a long way to go
The news on the easing of lockdowns is encouraging. Those countries that have managed to limit the damage from the virus are able to lead the way. Japan – which didn’t have a severe lockdown in the first place and has had remarkably few deaths – only 53 in the last 5 days – has ended the national state of emergency. Consumer confidence in Australia, where there have been no virus-related deaths reported in the last 5 days has retraced more than half of the collapse seen in March and April. Germany may have performed well in the crisis compared to other European countries, but it lags far behind these two countries. 95 deaths in the last 5 days related to Covid-19. It also reported on consumer confidence today and it remains very depressed. By way of comparison, the UK has had 882 deaths in the last 5 days – so a long way to go here.
A zonal approach to easing lockdowns
France is easing its lockdown by dividing the country into red and green zones. Green zones have fewer virus cases and medical systems that are not under stress. They can open up more rapidly. This approach has received very little attention here in the UK. If it did, London would presumably be a green zone: hospitals have plenty of empty beds and there have been just 132 new cases in the last 5 days, that’s just 1.3% of the UK total compared with population where London is 13%. The epidemic is basically over in London, yet it remains in just as tight a lockdown as the rest of the country.
Risk rally to rumble on
Much depends on the second waves. Much depends on the arrival of a vaccine, but we feel increasingly confident that economic activity and therefore corporate profitability will regain pre-virus levels in the second half of next year.
That suggests that the risk-on rally is set to continue. We cannot expect the same pace of advancement to continue though. There is a lot more optimism priced in now, markets are higher. But reverse indicators like market sentiment remain supportive, and cash levels and flow data suggest institutions have money to invest.
China tensions and upcoming elections are headwinds, but we still prefer the US
Trump has raised the rhetoric against China and the temperature looks set to rise as the elections draws near. But the Phase 1 trade deal looks set to survive, Trump wants those extra purchases of US goods by China, especially in agriculture, with certain key swing states set to benefit, which means no additional tariffs.
Geographically, we still prefer the US over Europe, despite today’s big rally precipitated by the news that the German government wants to take a stake in Lufthansa. The European Recovery Fund has suffered another setback; the ‘frugal four’ countries (Austria, Denmark, the Netherlands, Sweden) have essentially rejected the ground-breaking deal proffered by Merkel and Macron, and this highlights the weakness of Europe’s politicians. The ECB offers much better support and we will be watching to see how it can evade the grip of the German Constitutional Court.
Gilt yields should be higher – we remain bearish
Economic recovery and strong equity markets tend to be bad for government bond markets, though credit should outperform. So far, the latter has been true, corporate bonds have outperformed but government bonds yields remain very low. We have been surprised by the renewed talk of negative interest rates in the UK – we believe gilt yields should be higher. Given our outlook, central bank support for bond markets should be reduced substantially in 2021, so we are sticking with our bearish view, it’s just going to take more time.