It’s been a glass half full week with vaccine progress and an EU recovery fund deal agreed along with further stimulus expected in the US.
Covid’ created the need for lockdown and an effective vaccine removes the full lockdown threat and, perhaps more relevant to financial markets, further economic lockdown. It’s widely accepted that a vaccine is an important part of the criteria for the V shaped recovery to continue. While there is not an approved or tested vaccine, the trials are broadly positive and it looks as though the vaccine could provide a way out of Covid’. Progress to date is certainly well received.
The eventual agreement for the EU recovery fund has also been good news this week. Support by governments and central banks has been the driving force behind the recovery in markets and more recently economies this year. The numbers remain eyewatering in size with a further €750bn stimulus agreed in Europe and the US proposing a further $1tn. Relative to GDP (gross domestic product) and pre-Covid’ national debt they remain manageable. As an aside the US market has been pretty resilient to the increased infections and jobless claims emphasising an expectation of the proposed support. This is important support but the big question is whether the strong recovery will continue as economies are weaned off the fiscal medicine. In the UK easing of Furlough support starts soon with similar easing of equivalent support elsewhere (the US $600 per week safety cushion for out of work Americans is due to end 31st July). This feels like the real test of recovery sustainability.
There is encouraging data…for example Germany is further ahead in the emergence from lockdown and monthly restaurant bookings are up 1% year on year. The UK is still down by around 50% reflecting a later easing of restrictions. Retail figures have spiked in the UK, which is encouraging, but are still below year on year figures. Positive PMI (purchase managers index) data also makes an encouraging contribution to the outlook.
Locally, the UK has the added issue of Brexit to consider. Some sort of trade deal would be well received but global events are more likely to dictate the domestic agenda: trade deals, taxation, the growing issues between US and China along with healthcare are likely to remain in sharp focus. One investment commentator observed a recent, albeit slight, move away from stronger performing tech companies to more cyclical or economically sensitive companies (i.e. those which benefit from economic prosperity). This is a positive step broadening the market advance away from narrow tech leadership. Many companies will be reporting results for the second in the coming weeks which will provide a good indicator of how the recovery will play out.
Finally, in a personal attempt to help UK table bookings edge towards Germany, I’m going out for dinner tonight….to a restaurant. Armed with a mask (probably several as they’re now in every jacket pocket) and sanitiser, I’m taking a big step in my personal journey back to normality! I hope you have a good weekend whether you venture out or not.
Regards
Kenny