Nothing shows you up like a crisis.
In the early days and weeks of the virus outbreak, the majority of governments worldwide enjoyed a surge of popular support, as the sense of needing to rally behind leaders benefited incumbent politicians. The UK government became the most popular in decades, Emmanuel Macron, the French president, enjoyed his highest ratings yet. Italy’s prime minister saw approval ratings at a stunning 71%; but those ratings were bested by Angela Merkel, at 79%. These ratings may, of course, reflect European Central Bank policies as well as domestic policies, although ECB bond-buying plans face a new hurdle, as of last week.
“Under the leadership of Christine Lagarde, the European Central Bank has been much bolder and has moved much faster than we have seen in prior crises,” said Michael Power of Ninety One (formerly Investec). “However, Germany’s constitutional court has thrown a spanner in the works by referring the ECB’s planned bond-buying activities to the European Court of Justice. These are extremely serious matters for the eurozone. If they are not resolved in a way which allows the ECB’s stimulus to proceed, I believe an Italian exit from the bloc becomes a higher probability.”
EU retail sales were 11.2% lower in March than in February, the largest monthly dip on record. The EURO STOXX 50 had a bad week. Moreover, the EU began to face pressure from the US and Australia to support the launch of an independent inquiry into the origins of COVID-19. Mike Pompeo, the US secretary of state, claimed last week there is significant evidence linking the virus’s outbreak to a government lab in Wuhan. Beijing’s angry reply highlighted how far US–China relations have deteriorated in recent weeks, although US officials said on Friday that trade talks continue.
The White House had other worries, however, as an alarming US payrolls report last Friday showed the loss of 20.5 million jobs in April, after the ADP private sector report showed that nearly a decade of jobs gains had been wiped out in under two months. The US trade deficit widened by 11.6% in March; the pandemic has cut across global supply chains and knocked consumer spending. Exports reached their lowest level since November 2016, as global trade continued to deteriorate. US Purchasing Managers’ Indices for both manufacturing and services were far down in the mid-20s (where 50 indicates no change). Consensus forecasts now point to a U-shaped US recovery, not a V-shaped recovery. And that may have implications for the president’s ratings – and electoral prospects.
“The slow recovery will make it much harder for Trump to win a second term in office, which is one of the reasons he is pushing for an early re-opening of the US economy,” said Power. “Meanwhile, anti-China rhetoric is rising. This appears ill-advised, because the US imports a substantial proportion of its medical equipment from China.”
The US Treasury now expects a massive hike in borrowing, with the government likely to raise $4.5 trillion this fiscal year. Inevitably, that will affect markets too. As things stand, bonds and equities appear to be headed in different directions. While bond investors fret over debt levels, equity investors are clinging to hopes for growth. The S&P 500 rose significantly last week.
If Trump is worried about his ratings, a look to Brazil might lift his spirits. Jair Bolsonaro saw his ratings dip last week to the lowest of his presidency, with just 27% saying he’s doing a good or great job, and 49% saying he’s doing a terrible job. Last week, Société Générale forecast that Brazil’s economy will contract 7.4% in 2020. The Bovespa, Brazil’s leading stock index, is down more than 30% for the year; but this reflects a broader Latin American story, as mixed results on virus containment and plunging commodity prices weigh on sentiment.
The great exception in emerging markets, insofar as you can still include it in that bracket, is China. Although the services sector contracted (on a monthly basis) still further in April, the rate of contraction has slowed since March. Exports increased last month and the trade surplus climbed. A fall in revenue means the fiscal deficit probably ballooned in April. While the CSI 300 rose last week, there are now signs of a second spike in virus cases in China.
“Sentiment in China is actually pretty good – the Shanghai market is only down 9% in US dollars year to date, partly because it was the first country in and will be first out,” said Alistair Thompson of FSSA, manager of the St. James’s Place Asia Pacific fund. “Interest in autos is strong, probably because social distancing is expected to be around for some time, so people are avoiding public transport. And the supply side looks like it’s back on its feet, although the demand side is much more questionable, when most of the world is still in lockdown. If borders don’t open, trade and business will be limited for some time. But we’ve always preferred consumer staples because the sector is less volatile and cyclical.”
In the UK, meanwhile, the Monetary Policy Committee implied that more quantitative easing is to come and, with Brexit very much out of the public eye, trade talks with the US were formally launched, and reportedly began on a good footing. Meanwhile, the government was testing a contact-tracing app on the Isle of Wight, and on Sunday confirmed some mild easing of lockdown measures. (Early trading this week showed investors responding positively on the FTSE 100.) The Bank of England offered plenty to ruminate on when it forecast that the UK was due to suffer its worst recession in 300 years.
FSSA and Ninety One are fund managers for St. James’s Place.
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