Sep 28 2020

The week delivered a new set of social distancing restrictions to suppress coronavirus in the UK along with new policy action from the Chancellor to reduce the impact of the furlough scheme’s run-off in October.

Pubs, restaurants and hospitality venues are now subject to a 10pm closing time, office workers are being encouraged to work from home again, and the return to sporting events has been put on hold. The Prime Minister indicated that these measures could be in place for up to six months. Economic forecasters have predicted only a small additional negative impact to GDP from these measures, but risks are once again skewed to the downside as they will undoubtedly damage sentiment and encourage more consumer caution.

The two-week ‘circuit breaker’ national lockdown did not materialise, but ‘significantly greater’ restrictions could yet follow if infection numbers continue to rise, seemingly irrespective of hospital or fatality numbers that still remain well controlled.

Rishi Sunak presented the new Job Support Scheme (JSS) on 24th September as a replacement for the furlough scheme. It will begin in November and last for six  months. For those workers returning to work on a part-time basis and working at least one third of their normal hours, the Government and their employer will each top up one-third of pay lost for each hour not worked, with the Government’s contribution capped at just under £700 per month. All small and medium-sized businesses are eligible, but large firms will need to show a loss of revenue from the pandemic.

This scheme is much less generous than the furlough scheme, with employers now paying a minimum 55% of employees’ salaries and the Government a maximum of 22%. Even allowing for the many factors affecting redundancy decisions, for some companies facing the choice of keeping existing workforces on part-time versus shedding some workers and the remainder working full-time, the new scheme will not prevent job losses.

Businesses will also need to be generating some income to be able to take advantage of the scheme, and there are unfortunately many previously viable firms in the leisure and hospitality sectors that will be stuck on life support until wider restrictions are lifted.

‘Flash’ PMI survey data for the UK were again solidly within expansionary territory, though lower than August’s for both manufacturing and services businesses. The new social distancing measures and a more uncertain outlook suggests that more falls could come in coming months. The situation was the same in both the Eurozone and the US, with the services sector in particular running out of steam even as manufacturing continued to improve in Europe, driven particularly by increasing German exports:

The UK and the EU will start a key week of Brexit talks in Brussels on 29th September, with both sides warning that progress must be made in order to meet the October deadline for a trade deal. Discussions have so far produced little progress on a range of contentious issues including the ‘level playing field’, dispute resolution and cooperation on law enforcement, despite noises emanating from the negotiations last week that the tone had turned more positive.

If sufficient progress is made by Friday 2nd October, the two sides could embark on a two-week period of intense discussions – the so-called Brussels ‘tunnel’ – to hammer out an accord in time for a summit of EU leaders on October 15th; Boris Johnson’s self-imposed deadline for striking a deal.

As fears over the economic impact of rising infection rates came to the fore, equities were broadly negative for the week in Pound terms. A weaker Pound versus most major currencies helped overseas holdings, with the US and Japan generating the only positive returns with gains of 1.39% and 0.04% respectively.

Once again, investors’ worries were predominantly focused on Europe and the UK, with their equity markets faring worst. Infection rates are rising most quickly there, and restrictions have been widely reimposed. Having been a relative bright spot in previous months, European equities fell by more than 3.5% during the week. The boost in positive sentiment following the EU’s Recovery Plan announcement seems now to have worn off, and without further concerted intervention the malaise may continue.

The UK’s FTSE 100 and 250 indices dropped by 2.73% and 2.94% respectively. The sharp falls occurred at the start of the week with a consolidation through the remainder, but the market’s response to the Chancellor’s new package was underwhelming.

Government bonds proved more attractive this week, but Gilts and Index Linked Gilts were still negative with 0.04% and 1.13% losses, respectively. Corporate bonds were also negative, with only those strategies exposed to foreign currencies outperforming. Precious metals had a poor week, with the gold price falling by nearly 3%, and that of silver by more than 13% as sentiment soured. We have been expecting a consolidatory phase in these markets for some time given their strength this year, and despite these falls, both metals remain far ahead of global equities in 2020.

The economic data schedule is quiet this week until Thursday, when we have final PMI data for manufacturing businesses, and then Friday when we see the latest US jobs numbers for September. The 29th September also sees the first Presidential debate featuring Donald Trump and Joe Biden in Cleveland, Ohio. Biden’s task will be to post a sure and steady performance while Trump will no doubt seek to disrupt. Biden continues to lead in the national polls but many swing states look to be very close run, and investors will be watching the respective performances closely for any insights. 

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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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