WeekWatch – ‘”We’re not thinking about raising rates” – Jerome Powell, Fed Chair’ June 2020
Most financial traders don’t last in the job five years, and little wonder, given the stress of following every pitch and heave of the market.
They’ve had it even worse in recent weeks. First, lockdown precipitates a crash on markets. Then leading governments unleash a fiscal bombardment, markets start to rise, aided by a heartening US payrolls report. But last week, the chair of the US Federal Reserve acknowledged that the Fed doesn’t expect a full-blown economic recovery any time soon, and markets started to slide once again; or, to put it another way, US stocks dropped 34% between 19 February and 23 March, then had risen 40% by 4 June. Last week, they started to slide again.
And then there are the economic numbers. Last week, the OECD warned that the world was experiencing its worst peacetime slump for 100 years; meanwhile, the pandemic-induced US downturn was officially labelled a recession by the country’s National Bureau of Economic Research. Thus ended more than a decade of economic expansion – the longest in US history. As for the UK, data last week showed that GDP contracted by a stunning 20% in April. With numbers like these, you can at least be sure what a central banker isn’t going to do.
“We’re not thinking about raising rates,” Jerome Powell, Fed chair, said last week. “we’re not even thinking about thinking about raising rates.”
Indeed, 15 of the rate-setting committee’s 17 officials said they expect to hold rates close to zero through 2022. Another worry was a potential second wave: last week Beijing returned to partial lockdown, and new COVID-19 case numbers rose in Texas and Florida, as did hospital admissions in California. The S&P 500 index fell back below 3,000 points, ending a record run of 50 consecutive days of gains. The FTSE 100 came within a whisker of falling through 6,000 points again (and then actually did break through early this week); Carnival and Rolls Royce both suffered as travel and transportation woes continued.
The UK faced new forecasts of falling house prices; gilts carrying negative yields; a rise in job losses; a dramatic scaling back of businesses’ investment plans (as per an IoD business tracker); a threat from BA that it would sue the government over quarantine measures; and a warning from the outgoing chair of the Confederation of British Industry that the cash reserves companies had put aside for Brexit disruption had been spent on COVID-19. (Brexit talks remain all but deadlocked.)
“The Bank of England has much more work to do,” said Capital Economics. “It will probably start by announcing £100 billion more quantitative easing (QE) at the meeting on Thursday 18th June.”
Lockdown may dominate, but other corporate developments still matter. Unilever, the 90-year-old Anglo-Dutch company, completed its extended U-turn by deciding to incorporate only in the UK after all – a relief for London, but investors were unmoved. And Tesla last week became the most valuable car company by market capitalisation, overtaking Toyota – an astonishing feat, if the price is justified.
As globalisation retreats, the signs (or results) are multiple: the race for a vaccine increasingly resembles an arms race between nations. Last week, the EU took the surprise step of complaining that Beijing has been spreading disinformation on COVID-19 around the world. Meanwhile, as Zoom (a US company) blocked a video meeting marking the anniversary of the Tiananmen Square protests of 1989, speculation mounted over the implications for US businesses of a US Department of Commerce expansion of sanctions (announced in May) on Huawei; the Chinese tech giant will struggle to access the US semiconductors it needs to make waves abroad with 5G.
“To actually build up a modern chip fabrication facility is extraordinarily difficult without US tech,” said Dan Wang of Gavekal Dragonomics. “The sanctions could be very significant. Huawei may have very major issues beyond 6-7 months manufacturing its smartphones as well its base station – this will substantially affect China’s 5G rollout.”
While traders fret over the most immediate market fallout of such tussles, long-term investors are focused on the deeper changes that these strange times may presage for the post-lockdown global economy. One emerging beneficiary is the green agenda, not least as work commuting and leisure travel fall.
Last year, for example, China had 170 million migrant workers – rural residents who move to towns or cities for work – whereas now there are “just” 120 million, according to the National Bureau of Statistics. If government fiscal responses to COVID-19 are anything to go by, it may well be that – like younger consumers – they are willing to countenance radical green measures.
“We saw governments in the global financial crisis respond with QE and low interest rates,” said Kirsteen Morrison of Impax, manager of the St. James’s Place Sustainable & Responsible Equity fund. “This time round they’ve sought to secure jobs and put a continuity plan in place. Lessons have been learned from the last crisis on how to minimise the impact. But what we see more broadly is that now it’s shining a light on difficult to tackle issues like climate change and cyber risk. We think the support coming out of this is around a green recovery – a ‘build back better’. And the reason we’re hopeful is that it’s actually a way to create jobs.”
Impax is a fund manager for St. James’s Place.
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