Weekly Market Update

22/06/2020

The UK recorded 1,221 new cases of COVID-19 and 43 associated deaths on Sunday 21st June, as both trends continue downward. This coming week, the Government is mooted to relax social distancing rules in a boost to the hospitality industry, with the 2-metre rule set to be reduced, possibly with caveats related to the wearing of face coverings, using clear plastic screens and sitting back-to-back.

Non-essential retail reopened last week, and encouragingly large queues were seen across the country at major outlets. The data trends are certainly encouraging per the charts below, with city centre footfall still rising (though from a low base) and mobility data returning to normal, though public transport usage is still extremely low:

The UK is lagging behind in its recovery in comparison with other developed countries. Part of the reason for this is its slow reopening, but we have seen notable data improvements in countries soon after non-essential shops have reopened, so we would hope for the same here. In the US for example, retail sales for May rose by nearly 18% from April, in the biggest ever one month rise as the lockdown was loosened.

In addition, the Chancellor is expected to announce shorter-term fiscal stimulus measures next month to encourage consumer and business spending, in advance of a more comprehensive package in the planned Autumn budget. VAT could be cut from the current rate of 20% down to the current 15% floor, and tax holidays in force now could be extended and increased.

In markets, investors’ appetite was very much ‘risk on’ again as equities and credit both rose, helped along by the positive US macroeconomic data. These gains were tempered slightly towards the end of the week as some fears rose over increased infection rates in a number of US states, though not enough to derail the rally.

In Pound terms, European equities performed strongly, rising by just over 4% during the week, with the FTSE 250 close behind gaining 3.7% despite the Pound falling in value versus other major currencies. Emerging market equities were also strong, driven by Asia, whilst at the other end of the spectrum, Latin American equities lagged, eking out a 0.5% gain as the Brazilian Real fell sharply in value.

In fixed income, UK Gilts and Index-Linked Gilts fell sharply at the end of the week as the Bank of England’s monthly meeting proved less dovish than expected. The Bank’s quantitative easing (QE) programme was ‘only’ expanded by £100bn, where commentators had expected up to a £350bn increase, whilst the pace of monthly QE purchases was slowed to around £4.5bn per week from £13.5bn currently. The tone of the meeting was more upbeat than expected, with the Bank noting that the depth of the fall in GDP is likely to be less severe than originally expected, and the recovery taking root faster.

The speed of re-openings is crucial to the medium-term recovery, particularly in the UK as the furlough scheme taper start-point approaches next month.

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