Market Update – 20th May 2020.

US equity markets fell heavily in the last hour of trading yesterday (8-9pm UK time, 19 May 2020), after Stat, a medical news site, published an article that questioned Moderna’s coronavirus vaccine trial results.

As we stated yesterday (please see here), Moderna’s vaccine news was not a complete game changer due to its small sample size – phase 1 trial involved just 45 people (which is obviously far too small for any reliable trend to be determined).  However, it would appear that many market participants overlooked this fact!

As a result, the Dow Jones closed just over 390 points lower, or 1.59%, while the S&P 500 fell 1.05%.  The FTSE-100 is currently unchanged on the day at 6,000.

As we have previously said, because equity markets hate uncertainty (and the coronavirus outbreak is a big uncertainty), they are currently trading on every news headline – and over the coming weeks and months we will probably have to live with taking two steps forward and one step back, which unfortunately means that equity market volatility will remain elevated.

Additionally, and far more importantly, rather than focusing solely on Moderna’s small sample size, there are many other companies around the world working on a vaccine and so the chances of a breakthrough is probably not too far away – and of course, a vaccine will speed up the economic recovery.

Of more interest to us yesterday was a Bloomberg interview with the Bank of America CEO, Brian Moynihan.  He stated that in the first part of May, consumer spending and borrowing activity was only down between 2 and 4% from the same period last year.  He also stated that requests for loan payment deferrals were starting to come down, and of those customers that had requested a deferral, 40% didn’t then skip their loan repayment – which suggests to us that bad loan and credit damage that the big US banks have provisioned for (please see here), may not materialise and that the US economy could quickly bounce back, especially given the fact that Advance Auto Parts (a US company that is similar to Halfords) said its sales were currently about the same as last year, while Home Depot (the US equivalent of our B&Q) said that its Q1 total sales growth was 7.1% and Q2 sales growth had accelerated into double digits.

In the UK this morning (20 May 2020), UK CPI inflation in April slowed to just 0.8% from 1.5%, while the core rate (which excludes volatile energy and food prices), slowed to 1.4% from 1.6%.  This reading will undoubtedly result in even more speculation that the BoE will take UK interest rates below zero (please see here).

Additionally, as the headline rate is less than 1% (the BoE’s target is 2%), Andrew Bailey, the BoE Governor, will have to write to Rishi Sunak, the Chancellor and explain the reasons for the decline, although they are pretty obvious:  the downward pressure on prices predominately came from fuel (which fell 13.1%), energy (-9.3%) and clothing (-3%).

While we wouldn’t be surprised to see negative interest rates in the UK, the coronavirus is making it hard to accurately interpret the inflation data as the lockdowns are changing both what we are buying and our perceptions of inflation.  For example, the lockdown means that we are currently unable to take advantage of the cheaper fuel costs, while buying a new outfit or a pair of shoes isn’t really a consideration.  However, our food costs have increased, with meat 2.9% more expensive and alcohol & tobacco costing 2.5% more.

Later today (7pm UK time), we will get the minutes from the Fed’s meeting which was held on 28-29 April 2020.  Although much of the commentary on the employment market and inflation will be dated, we will be looking for comments around the potential for more stimulus and the potential for negative US interest rates.

Investment Management Team