May 11 2020

As I am sure you are aware, the Prime Minister, Boris Johnson announced the first change to the UK’s lockdown rules yesterday (10th May), with full guidance due to be released today.

The good news is that virus data continues to improve in the UK and indeed generally across Europe. Domestically, per the first chart below the trend of COVID fatalities continues downward despite the new inclusion of care homes, whilst hospital patient numbers are also declining, per the second chart:

Spain yesterday recorded its lowest level of fatalities since March 18th as 143 people sadly died, and in Italy, Prime Minister Conte announced the potential for lockdown to end earlier than anticipated as new cases and deaths fell precipitously.

Though the US continues to report high case and death numbers, various States have begun to fully reopen. The risk remains that the virus is not yet under control everywhere, nor is there the necessary testing and tracing infrastructure to avoid a secondary wave of total lockdowns. Despite this, data clearly shows a pick-up in economic activity, as the chart below shows through a rise in railway freight and new business applications, with the latter indicating a revival of entrepreneurs’ animal spirits:

In markets, risk assets were generally positive, and particularly in Pound terms as the currency weakened versus most other major countries. Investors have grown nervous of the UK’s handling of the virus crisis and we are also seeing Brexit worries resurface as the Government remains resolutely opposed to extending the transition period due to end this year.

The weakness in the Pound meant that the large-cap FTSE 100 index (+3.14%) outperformed the mid-cap FTSE 250 index (+0.64%), given its higher weighting to overseas corporate earnings, whilst other equity regions were similarly boosted. The US S&P 500 index again rose strongly by nearly 4% as investors continued to enjoy positive returns particularly from large-cap technology stocks, and Japanese equities also performed well again, rising by 2.71%.

The story was similar in fixed income with overseas bonds performing well when translated back into Pounds, and UK based assets underperforming. Precious metals prices continued their strong run upwards, boosted by increasing investor demand for physical exposure. The prices of associated mining stocks have also performed well over the last six weeks, rebounding strongly from their lows in March.

Looking forward, UK and German GDP for the first quarter is due to be released this week, with the former expected to fall by 2.5%, and the latter by 2.3%. For the UK this would be the biggest contraction since 1974 when strike action forced a three-day working week. Unfortunately, these drops are just a taste of what is yet to come. Germany’s government expects its economy to shrink the most since World War II this year with a 6.3% contraction, and the Bank of England (BoE) predicts a crash of 14%. That would be the worst result since 1706, the year when England and Scotland were unified into a single country under the reign of Queen Anne.

The BoE stands ready to provide even more support to the economy should it be needed, as do the rest of the world’s central banks. Equally, Government support remains in place to ease the pain of lockdown. In the UK we hope to see a continuation of the downward trends highlighted above, which could lead to a faster reopening and a dampened economic impact.

The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guide to the future. The views expressed in this publication represent those of the author and do not constitute financial advice.

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Andrea Barker
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