Reopening The Economy
After the steep falls in equities seen in February and March, the financial markets have almost recovered somewhat and several factors have combined to boost investor sentiment.
The spread of Covid-19 has not been as bad as was feared in the middle of March and this has brought equity markets off lows.
This has been supported by an increasing focus on reopening the economy, with parts of the US likely to follow recent easing measures in coming into place in Europe. However, experiences in Singapore and Northern Japan suggest reducing lockdown measures isn’t a simple process as there have been outbreaks of new cases emerging.
Central bank liquidity injections have boosted portfolio flows into riskier assets such as equities.
The US Federal Reserve’s balance sheet has grown by $2.3 trillion since March. This has helped to make a marked improvement in the functioning of the bond markets especially corporate bonds.
As markets continued to push higher in April some investors who had become cautious in March and were keen to recoup losses began to chase the market higher. The rebound has also been driven by “short-covering”. This is the process where some investors buy back shares to end a trade which was initially executed to gain from a falling market.
The Bank of England has warned that the UK economy is heading towards its deepest recession on record.
The impact of coronavirus meant the economy would shrink 14% this year, based on the lockdown being relaxed in June. The Bank’s policy-making committee voted unanimously to keep interest rates at a record low of 0.1%. However, the Monetary Policy Committee was split on whether to inject more stimulus into the economy.
Two of its nine members voted to increase the latest round of quantitative easing by £100bn to £300bn. No new measures were introduced. Markets in Australia, Japan and Hong Kong are among the only bourses in positive territory at the start of the trading week. With last Friday’s US payrolls report revealing the worst job losses in history, investors are getting a reality check on how far the economy might fall before it hits a bottom.
The money flow is in the stock market and wants to push equities higher, but there has also been an increasing outflow of capital from stocks into money markets, gold and safe haven dollar. That tells us there is a lot of uncertainty out there.
As bitcoin halving takes place this week, bitcoin had shot up over 16% from its weekly low and had approached the $10,000 but it was short-lived and had seen the price fall below $8,500.
A well know hedge fund investor, Paul Tudor Jones said he was long bitcoin.
Reports suggesting he is buying bitcoin as a hedge.
We are seeing a growing number of institutional investors indicating an interest in bitcoin in the face of unlimited money issuance and economic strain.
The coronavirus pandemic remains in focus, as economies around the world begin to re-open, and the progress of the pandemic continues to slow.
Meanwhile, we will also be treated to a significant number of speeches from Federal Reserve policymakers this week, highlighted by short-notice remarks from Chair Powell on Wednesday. This speech will be the perfect opportunity for Powell to push back on the market pricing of negative interest rates, and to avoid the FOMC from being bullied into something by the market once again. A total of 10 speeches are lined up for the week ahead, from both voters and non-voters.
Brexit is back on the agenda with UK-EU talks on the future trading relationship starting this week.
The on-going negotiation headlines may pose some volatility to the pound as the week progresses. The UK Government continue to insist that the transition period will not be extended, a decision which must be confirmed by the end of June based on specific rules outlined in an attempt to get the economy moving again.
On the data front, it is a quieter calendar this week.
It includes three important releases from the US; April’s inflation and retail sales reports, and May’s preliminary University of Michigan consumer sentiment figure.
Elsewhere, labour market data from Australia, and the second estimate of eurozone Q1 GDP will also be in focus.