In what is becoming a familiar pattern, we shifted back to a risk-off tone with some healthy profit taking last week. The falls were prompted by concerns of a new spike in infections in the US and a downward assessment of growth prospects from the US Federal Reserve.
Covid-19 cases in New Mexico, Utah and Arizona rose significantly within the US last week. The jump in cases has raised concern that lockdown restrictions had been loosened too soon and indicated a second wave of the infection was possible.
Given the lag between the actual infection and a positive test or being hospitalised, this trend is likely to increase in the coming weeks given the recent lifting of restrictions. The key question is how bad the second wave will be and how authorities will react.
Central bank action is continuing to prop up markets, with banks and governments outbidding each other to try to combat the Covid-19 recession.
US Chair Jerome Powell warned that the US faced a long road to recovery and confirmed the central bank would keep interest rates near zero for the foreseeable future, at least until the end of 2022.
After bottoming out in April, economic activity has continued to rise into early June, recapturing some of the collapse that occurred when most of the country locked down. However, as both demand and supply will remain constrained by health considerations, many workers that are currently furloughed will unfortunately become unemployed.
This either means more government and central bank support for the recovery to bring unemployment rates down, or the risk of a W-shaped recovery, with a second leg to the recession late this year.
In the UK, GDP growth fell by 20.4 per cent in April, following a 5.8 per cent fall in March. The figure, which is worse than economists forecast, was three times the size of the damage seen during the credit crisis and put further pressure on share prices.
The news lays bare the extent of the damage caused by the pandemic and underlines the urgency to get the UK economy moving again as the country slowly comes out of lockdown.
The Bank of England Monetary committee meet this week to review any changes to their strategy. So far, the MPC has been on the same page on interest rates, voting unanimously to keep the BoE base rate at 0.1 per cent last month. But there is some dissent on whether the central bank’s QE programme, is sufficient to combat the effects of COVID.
In theory there is still scope for the bank to increase QE further, but sceptics will question whether using the same blunt instruments which have offered only lukewarm growth and little sustained success in meeting inflation targets while potentially stoking asset bubbles and therefore social inequality is a good idea.
I suspect that markets will roll through periods of risk-on and risk-off over the summer and beyond. Central banks have done a lot, and this impacts markets daily. Households do not know what will happen when income support policies come to an end.
Companies have liquidity but there will be a cash-burn until revenue starts to recover. We should not expect too much of an increase in consumer spending or capital investment even though there is plenty of ammunition.