How quickly the global economy can return to some semblance of normality as coronavirus lockdown restrictions are eased is perhaps the key question facing investors at present.
There were sharp falls for shares on both sides of the Atlantic late last week and at this start of this as fears were raised that deteriorating relations between the United States and China could hamper efforts to reboot international trade and investment, and get global supply chains moving again. President Donald Trump, who is seeking re-election in November, has strongly criticised the Chinese regime’s handling of the initial Covid-19 outbreak and has suggested that the US could take punitive economic action in the weeks ahead.
In the three sessions until close on Wednesday, US stock markets managed to put a lid on last week’s losses: the Dow Jones Industrial Average was down 0.25% while the S&P 500 posted a gain of 0.63%. After falling on Monday, share prices recovered strongly on Tuesday as major economies announced more detail of how they would emerge from lockdown.
Meanwhile, oil prices have recovered strongly this week – partly in recognition that the huge slump in values recorded in April was excessively negative. Other sectors of the economy continue to struggle, however, most notably aviation this week: on Monday, airline shares around the world slumped after veteran investor Warren Buffett said he had sold the entirety of his holdings in the major US carriers.
While most of the world’s passenger aircraft are grounded at present, there are also significant concerns over the extent to which flights and airports will be able to return to business as usual while strict social-distancing measures remain in force.
Meanwhile, the news on Wednesday that the US had lost more than 20 million jobs in April – the latest in a line of shocking unemployment statistics – did little to move markets on Wall Street.
In the UK, the FTSE 100 has been the leading performer in Europe with a gain of 1.6% recorded by the end of trading on Wednesday. The bounce back in oil prices has played a big role in this rise, with BP and Shell making significant contributions to the index on Tuesday’s in particular. But much of the optimism in the City is based on the UK government’s announcement that lockdown restrictions will start to be eased as soon as next week, with detailed plans already in place for how businesses can start to get back to work in as risk-free a manner as possible.
However, news that the Bank of England has said the UK economy could shrink by 14% in 2020, shrinking by 25% in the current quarter before bouncing back a little during the rest of the year. 1
In Europe, this week’s performance has been skewed to some extent by the fact that bourses on the Continent were closed last Friday for May Day – as such, the losses seen elsewhere in the world late last week were simply postponed to Monday.
In Germany, the DAX closed Wednesday’s session 2.4% lower for the week, while the CAC 40 in France was down 3%. As well as US-China trade concerns, investors in Frankfurt and Paris have had to contend with further dire economic data from the eurozone, as well as some controversy over the role of the European Central Bank in helping euro-area economies deal with the pandemic. On Tuesday, Germany’s highest court ruled that the ECB’s ongoing bond-buying programme violates the country’s constitution because there is insufficient German involvement in decision making. While it remains unclear what practical impact the ruling is likely to have, it is the latest indication of the disagreement among leading EU members over how best to help the likes of Italy and Spain recover from the economic devastation caused by coronavirus.
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 06/5/2020.