Market Update – 11th August 2020.

Just like parents waiting for their children’s A-Level results this week, equity markets have a nervous wait for this week’s review of the Phase 1 US/China trade deal, given China is currently behind on its agreed US purchases.

Exacerbating our frayed nerves was the ratcheting up of US/China tensions after it was announced that China was sanctioning 11 Americans, especially as they targeted a number of Republican Senators, in retaliation for the US sanctioning 11 Chinese officials last week, which included the Hong Kong Chief Executive, Carrie Lam.

However, despite this uncertainty global equity markets welcomed the news that Donald Trump signed an Executive Order over the weekend aimed at providing economic stimulus to the US economy.  As such the Dow Jones closed last night up over 350 points, or 1.30% and the S&P 500 ended up 0.27%, while the FTSE-100 ended the day nearly 20 points higher, or 0.30%.

Although Donald Trump’s Executive Order is controversial as the majority of the enhanced unemployment benefits will be funded by diverting money from the $44bn disaster relief fund (which means that if US unemployment claims don’t fall significantly, the fund may only last around two months – meaning it will run out just before the Presidential Elections on Tuesday 3 November 2020), it does buy time to get Republicans and Democrats back around the negotiating table.

As for today (11 August 2020), it’s shaping up to be another good day despite this morning’s UK employment data, with the FTSE-100, as we write, up just over 100 points, or 1.70%.

Although the unemployment rate was static at 3.9%, the data doesn’t actually tell us very much, as the government’s job retention (furlough) scheme has been very successful in helping to support the UK economy and as such has effectively kept the unemployment numbers artificially down (just over 9.5m workers, or nearly a third of the UK workforce, have been furloughed).

However, as the furlough scheme is now starting to be wound down (and ends on 31 October 2020), we will only start to see the full extent of the damage caused to the UK employment market by the coronavirus in the coming months.

Likewise, it is safe to say that tomorrow’s (Wednesday 12 August 2020) UK Q2 GDP data won’t be pretty.  We wouldn’t be surprised to see that UK economy has contracted by over 20% – but again, the data is unlikely to tell us anything we don’t already know (i.e. the economy has hit a brick wall).

However, it is likely to confirm to us that the BoE is wrong and the UK needs further monetary stimulus via an interest rate cut and/or a significant increase in QE (please see here).

Investment Management