We start the week with mixed economic data across the globe as August ‘flash’ business surveys in the US and UK in particular, showed better momentum; outperforming those in Europe and Japan. European manufacturing continued to recover but with renewed lockdowns and travel restrictions in several countries came a fall in services activity. As has been clear for some time, countries’ recoveries will be uneven and susceptible to pullbacks in the event of government intervention.
The bounce back in UK activity was above expectations and indicates a continued acceleration of the recovery in both services and manufacturing; the services index at 60.3 signalled the fastest rate of expansion since October 2013:
Retail sales in the UK rose by 3.6% in July and are now 3% above pre-crisis levels in February, following gains in May and June, driven by a 11.9% month-on-month increase in clothing sales. Perhaps more importantly, online sales fell by 7%, suggesting that the recovery in physical shops was more impressive than the headline figure, and that shoppers are starting to return to the high street.
The ‘eat out to help out’ scheme continues to drive restaurant activity higher as the chart below shows. The ONS estimates that in the week to 16th August, 93% of adults said they had heard about the scheme, 11% said they have already eaten out and received the discount, and a further 41% said they were very likely or likely to make use of it during August:
Finally, the ONS also estimates that almost two thirds of workers who were put on furlough are now back at work, meaning around 12% of the UK workforce is still being paid to stay at home, per the chart below. While unemployment is expected to rise as the furlough scheme tapers through to October, in light of a more positive economic rebound, Oxford Economics now believes that it will peak at 6.5% by the end of 2020, rather than the 8-10% figures forecasted by other analysts:
The Chancellor has firmly rebuffed those urging him to extend the furlough scheme, even as other countries such as Australia and France extend theirs. Jobs will be permanently lost, but the scheme’s cost is enormous, with the OBR estimating it at £47bn, and some argue that many ‘zombie jobs’ could be propped up that would not survive in the post-COVID work environment.
In markets, US equities reached an all-time high, fully recovering losses from the Coronavirus selloff despite a jump in weekly jobless claims and a continued impasse on another Coronavirus relief bill.
The S&P 500 rose by 1.05% during the week, ahead of other developed and emerging market indices. Asian equities eked out a positive 0.53% return, with the broader emerging market index rising by just 0.17%, dragged back by poorer performing Eastern European (-4.79%) and Latin American (-2.87%) bourses.
All other major indices fell, with Europe and the UK worst after more negative signalling around Brexit negotiations. The FTSE 100 fell by 1.32% and the FTSE 250 by 0.81%, with the UK remaining one of the weakest performing regions globally this year. The outlook for corporate earnings also remains poor in absolute and relative terms, meaning the potential for upside surprises is greater.
Fixed income returns were generally muted, with more volatility seen in government bond markets. UK Gilts rose by 0.23% whilst Index-Linked Gilts fell by 0.41%. Precious metals prices rose sharply at the start of the week before fading into Friday’s close; silver rose by 2.65% and gold by 0.14% in Pound terms.
Looking forward, November’s US Presidential election is starting to come into sharper focus as newly anointed Democrat candidate Joe Biden gave a sybaritic speech challenging Americans to embrace the ‘path of hope and light’. Not naming President Trump directly, Biden told the largely virtual audience that he ‘will be an ally of the light, not the darkness’, framing the election as a fundamental referendum on the nation’s character.
Turbulence already surrounds the election as controversy around postal voting has engulfed the US Postmaster General – a major Trump donor – even as polling data shows a narrowing between the two candidates. Both sides will look to bolster their credentials on a range of topics in the coming weeks, with analysis to follow on potential outcomes.
Whichever candidate prevails, we would expect a continuation of extraordinarily easy monetary policy from the US Fed, and loose fiscal policy to a greater or lesser degree. A Biden presidency is touted to bring with it higher levels of corporate taxation, but equally may usher in a much needed calmer political and geopolitical period for the US. We will study developments with interest.
Market views by Ollie Stone – Head of Portfolio Management and Fairstone Private Wealth Ltd (24th August 2020)