Last week markets were buoyed by encouraging US employment figures and Chinese services data but growing concerns over a resurgence of cases in countries where lockdown had eased, particularly in the US, prompted investors to pile into gold.
US jobs increased by 4.8 million in June, and the unemployment rate dropped to 11.1 per cent. Although a significant achievement, many of those jobs were predominately people returning to their old jobs.
With restrictions being reintroduced, July’s employment prospects may not be so strong which could imply the economic impact from the pandemic will endure longer than markets are assuming.
The Government has announced a new deal for rebuilding to spur economic growth though the £5bn package represents only 0.2 per cent of GDP. The assumption remains that there is plenty more to follow as the Prime Minister, aided by the generosity of the Bank of England reiterated there would be no return to austerity and that decisions on increasing taxes and cutting services will have to wait.
While China’s stock markets hit a five-year high following some strong Services PMI data in May, investors were more focused on the political front as authorities introduced a new national security law for Hong Kong.
It introduces new crimes with severe penalties and allows mainland security personnel to legally operate in Hong Kong with impunity. There were many arrests locally while in the US, the House of Representatives passed legislation penalising banks doing business with Chinese officials involved in the new Hong Kong national security law, adding further tensions to US-Chinese relations.
The market mood around the economic impact, and the length of economic disruption, resulting from the Coronavirus appears to be complacent. The Covid-19 pandemic is clearly a long way from over and more economic data, and time, is needed to form a strong view on the robustness or otherwise of the economic recovery.
While nationwide lockdowns will remain a very last resort given the very high political and economic cost, the duration of the pandemic suggests a drag on economic activity for an extended period, with certain economic sectors struggling to return to normal for even longer.
With market volatility still elevated, a period of consolidation would not come as a surprise, but we should also remember that central banks will continue to provide support, and given their whatever it takes mindset, further interventions seem likely if financial conditions deteriorate.