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Stock markets have been a little stronger this week, despite the rising COVID cases and further restrictions on activity being imposed across western economies.
Whilst COVID-19 cases continue to rise, President Trump’s time in hospital proved to be brief after he returned to the White House on Monday evening having had a rapid course of experimental drugs, as well as oxygen and dexamethasone to boost his recovery. Leaving hospital to continue his recovery at the White House, the President tweeted that he “felt really good”. President Trump’s health issues do not seem to have made any difference in terms of the opinion polls, where the national poll of polls still give Joe Biden an 8-9 point lead, and the polling for the swing states continues to favour Joe Biden. A clear victory for Biden would reduce the options for Trump to contest the election, which would be good news as a contested result would be an outcome that would see a period of intense uncertainty and potential market volatility.
There appeared to be reasonable optimism at the start of the week that the US was seeing the political parties moving closer to some sort of COVID stimulus deal following talks between Treasury Secretary Steven Mnuchin and House speaker Nancy Pelosi. This was followed by an acknowledgement from Senate majority leader Mitch McConnell that talks have "speeded up in the last few days”. However, on Tuesday, President Trump had evidently recovered enough to get back to his usual box of tricks via twitter. He stated that he wanted fiscal stimulus negotiations to be put on hold and asked McConnell to focus on the Supreme Court nomination process. He tweeted "I have instructed my representatives to stop negotiations until after the election, when immediately after I win, we will pass a major stimulus bill that focuses on hard-working Americans and small businesses". Trump’s call for an end to negotiations reversed stock market sentiment temporarily, until he then sent various tweets suggesting he would be open to some stimulus, particularly around a bailout for the US airlines. He also stated, unsurprisingly with the election just around the corner, that he was willing to sign any standalone bill for the payment of $1200 cheques to eligible individuals. Why are we not surprised! The idea that there was still scope for some stimulus via various bills ahead of the election helped markets back on track for the week.
The Federal Reserve (FED) once again made it clear this week that they expect to see further fiscal stimulus and indeed the minutes for the most recent FED meeting highlighted that the FED’s assumptions made when forecasting the economic outlook were predicated on another round of fiscal stimulus. The FED noted that if this stimulus was smaller or later than expected, then the pace of the economic recovery could be slower than anticipated. FED Chair Jerome Powell spoke earlier in the week on stimulus and said that "the risks of overdoing it seem smaller than the risks attached to eschewing stimulus, which would lead to a weak recovery and unnecessary hardship”. We are not sure if this will influence Trump.
After the conclusion of the latest round of Brexit talks last week, the Prime Minister and European commission President Ursula von der Leyen held a video call and instructed their respective negotiators to “work intensively in order to bridge the gap, emphasising in a joint statement the importance of "of finding an agreement if at all possible". The Prime Minister said he would of course like a deal but still claimed the UK could “prosper” without one. The talks that concluded last Friday saw European Union chief negotiator Michel Barnier warning that “major disagreements remain, and that time is running out”. For the UK, David Frost said that there had been “limited progress” in settling differences on what state aid rules the UK will follow and the gap on fisheries is "very large and without further realism and flexibility from the EU, seems impossible to bridge". There were various media reports during the week that the UK plans to quit the talks at the end of next week if a deal is not in sight; this echoes the deadline given by the Prime Minister several weeks ago. However, the Financial Times and others have reported that the EU expect the talks to go beyond the European Council meeting next week and that the stance from both sides on fisheries and state aid has sufficiently softened such that talks next week will make enough progress for the UK not to walk away when the possibility of a deal is on the horizon. If a high-level deal can be agreed between the Prime Minister and the European Commission, then intense talks on the details may well extend into November. The intensity of the talks has certainly increased this week, with Michel Barnier back in London, though it remains unclear how far away a deal really is. Next week should give us some clarity either way.
Interesting that Michel Barnier travelled to London, given the capitals own rise in COVID cases. In terms of the COVID-19 pandemic, the case numbers in the UK continued to rise to new record levels, though it is again worth reminding ourselves that comparisons with the first wave back in March and April in terms of case numbers are not representative given that substantially more testing is taking place now. What data is more comparable is hospitalisations, and these are now on the rise in the UK; there are now 2944 people in UK hospitals; this compares to a high of 17,000 back in April.
Yesterday, the Chief Medical Officer warned members of Parliament, that in parts of England, hospitals would have more COVID-19 cases in three weeks’ time than at the peak in April. Further restrictions on activity are to be expected as the UK looks to initiate an alert level system which may smooth out some of the variations in local rules and could be implemented early next week. This is likely to see further restrictions imposed on the North West and North East of England, and at a lower level potentially in London given the high and rising number of cases. It appears the government is also looking at additional fiscal measures to support businesses that will be impacted, such as a local Furlough scheme. We have also seen a return to much tighter restrictions in Scotland, with the closure of pubs across a large part of the country, covering two thirds of the population. In the US, 34 out of 50 states are now seeing a higher average of new cases than a month ago. While the hotspots of the summer (California, Florida, Arizona and Texas) have seen case levels ease, the rise in cases across the Midwest and north-east are causing some concern.
In terms of the vaccine, there remains an expectation we should get the first signals of efficacy towards the end of this month from the Pfizer trial in the US with the Oxford University/AstraZeneca trial reporting early next month. Assuming a positive outcome, emergency approval would follow, potentially with a roll out as early as December in the UK. This is a best-case scenario. The FT reported that the head of the UK vaccine task force said that less than half the UK population could actually get vaccinated initially with the a focus on the over 50s, as well as the vulnerable, health workers and care home workers. These reports highlight the fact the vaccinations are going to take time to deliver to the broad population which means that restrictions on activity will remain in place well into 2021.
As always, we remain mindful of the ever-changing news and economic data and we are actively avoiding areas of the market that we either cannot be confident in or where the risks outweigh the prospective returns. We hope that this gives our clients some comfort as we move into the latest phase of the pandemic. There are still plenty of investment opportunities out there that will benefit from the current economic climate and as ever, should you have any questions, please do not hesitate to be in touch.