After another week of exceptional headlines, I write to summarise my understanding of these and how financial markets have responded. Thank you for your feedback and suggestions following which the next update will be by webinar on Friday 3rd April at 10am.
The news flow is constantly changing and webinar content is arguably best shaped by the audience, so please email any questions you would like answered during the webinar (which will not be attributed to the originator).
The updates aim to provide useful content and ideally, to give a better understanding of the key factors needed to stabilise financial markets in the short term, the progress made towards this and what still needs to happen.
So, to recap, last week US and European central banks and governments pledged huge financial support for business and households. This was very positive, against which the increasing spread of the virus and mortality rates have heightened concern and lead to stricter, stay at home restrictions.
Several things are needed to stabilise financial markets: effective containment of the virus spread, government financial support of sufficient size and nature, and central bank support for governments.
Thankfully, in response to this, government actions to contain the virus stepped up quickly and nationwide shut downs have now been imposed across Europe. The European Central Bank also pledged to do “whatever it takes” to support governments and big business. In turn, government payments for smaller businesses and households are now underway across Europe. These are important boxes to have ticked and while financial markets have responded positively, it’s very early days.
The not so good news is this isn’t a recession or slow down, it’s a complete shut down for many businesses. Second quarter earnings are going to make horrible reading, however most of this bad news is already priced into financial markets. Once lock down is lifted, it will be third and fourth quarter earnings that show how quickly business returns to work and how consumer spending returns to the high street.
Corporate earnings and consumer spending are key drivers for recovery which is why government support for both businesses and households is, and will continue to be, so important.
Financial markets also need demonstration of the effectiveness of lock down on the spread of the virus and that health services can cope. Ultimately, infections need to peak and then reduce, before lockdown eases and we are once again a working economy.
The herd immunity point also needs to be better established by way of virus test, as it appears there may be many recovered asymptomatic carriers who could otherwise work but are currently locked down.
We’re only at the start of lockdown. Data from China confirms that lockdown reduces the infection rate, and so far there is no wave of secondary infections in China. This again is positive, however there is a niggling concern over the US infection rate and the potential effect on it’s economy. US ideology is perhaps less in favour of big government lockdown intervention (measures are at state rather than national level) despite the correlation between draconian lockdown and infection rate.
In conclusion we don’t know how long we’re in lock down (albeit China has returned to almost full production remarkably quickly). The initial financial market reaction to financial stimulus has been positive but again, it’s early days and there are many unknowns. Once we return to a working, functioning society we will be better able to assess the shape and timeline of financial market recovery.
We’re following government guidance and closed our office on Monday night. We are all working very effectively from our respective homes and can deal with emails, calls and video conferencing exactly as we would in the office. There should be no tangible difference in the service you receive.
I hope this brief update is helpful at a time when reassurance feels particularly important. I remain available to discuss matter and look forward to receiving any suggested webinar content.
Regards
Kenny