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Last Week in the City: Can the bounce last?

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (23 – 27 March 2020).

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (23 – 27 March 2020).
Garry white employee

by
Garry White

in Features

27.03.2020

It was a volatile but, ultimately, positive week for global equities, as indices staged a rebound from the recent sharp sell-off. Some decisive moves by governments and central banks helped bring some calm and reassurance to markets. Financial conditions have eased a little, with more order seen in both sovereign and investment grade corporate bonds markets too.

However, it is likely that a major factor boosting equity prices is a technical issue. Many institutions – and this is particularly true for pension funds with large amounts of money to invest – have rules that dictate what proportion of a portfolio should be in equities and what should be in bonds. Stock market falls means they are now ‘underweight’ in their holding of shares compared with their mandate. Managers needed to rebalance the portfolio by buying more equities before the end of the month. This should not be read as a market timing move by big industry players. Short covering, investors buying back shares they borrowed to close position on bets a share price will fall, was also a factor.

Even though moves to support markets and the real economy have been significant, it is still too early to call a decisive turn in equity markets. Economic data will show that the global response to Covid-19 will have caused the sharpest and most substantial correction in global economic activity seen since the Second World War. There will certainly be a collapse in corporate earnings for at least two quarters. 

Investors will need to continue to consider the impact of emergency measures to slow the spread of the virus against actions taken by governments and central banks to ease the impact of disruption. This means volatility is likely to continue.

The FTSE 100 was up about 7% over the week by mid-session on Friday and the FTSE 250 gained 8.8%.

Paul Abberley, Charles Stanley’s Chief Executive, provides a business and market development update here.

All Charles Stanley’s Coronavirus-related business updates can be found here.

Coronavirus (Covid 19) action

The Senate overwhelmingly passed a massive $2 trillion stimulus package that's meant to soften the economic blow of the coronavirus pandemic for American workers and businesses. The following day it was confirmed that the country now had the most confirmed cases of the infection in the world. It will allow homeowners hurt by the health crisis to postpone mortgage payments for up to 12 months. This mirrors moves announced last week by mortgage giants Fannie Mae and Freddie Mac. The plan aims to make sure the millions of job losses caused by the social distancing restrictions imposed by governments don't spark a wave of foreclosures. This was also a significant event in the US it increased the reach of the Federal Reserve into the fiscal space. The package passed by the Senate also proposes to “earmark” $400bn for Fed collateral to fund assorted lending programmes. This led some to argue that fiscal and monetary policy will become ever-more intertwined.

Following criticism that self-employed people will not be covered by last week’s announcement that employees kept on by struggling UK businesses will have 80% of their wages subsidised by the government, Chancellor Rishi Sunak has announced measures to support them too. If the self-employed suffer a loss in income, a taxable grant will be paid to the self-employed or partnerships, worth 80% of their profits – up to a cap of £2,500 a month. Initially, this will be available for three months in one lump-sum payment. The catch – it won’t be paid until June.

India announced an economic stimulus package worth $22.5bn on Thursday. The package would be disbursed through food security measures for poor households and through direct cash transfers, Finance Minister Nirmala Sitharaman said.

The stimulus measures launched around the world eased some of the fear that has been driving market moves in recent weeks - and the dollar was on track for its biggest weekly fall in more than a decade on Friday. However, some of this was down to the repatriation of dollars to Japan ahead of the country’s year-end. 

Economics

The most significant piece of data released this week was a US unemployment report. It made grim reading. A record 3.28 million workers applied for unemployment benefits last week as Covid-19 started to make its mark on the US economy, marking an abrupt end to its decade-long run of job growth. he massive spike in new jobless claims comes as nationwide lockdowns to halt the spread of the coronavirus pandemic have kept Americans from their workplaces, grinding businesses to a halt and forcing. Many companies continue to shutter or to lay-off staff. Just 282,000 people filed for unemployment in the previous week.

John Redwood looks at the US stimulus measures here.

Next week we will see final readings of March purchasing managers index (PMI) released by survey group HIS Markit. They are expected to confirm initial reading of a slowdown in activity globally (see chart below). Chinese data will be particularly scrutinised, as the outbreak has been impacting its economy for longer than other major nations.

PMI reading show that economic activity slumped in march due to coronavirsJohn Redwood looks at the measures introduced by global authorities here.

Retail

There was some expectation that retailers with good online and delivery services may do well as people are forced to stay at home. However, disquiet mounted about staff picking the goods in the warehouse and the unions became involved. Next made a U-turn over its decision to keep warehouses open and ask workers to travel into stores for picking online orders, following backlash from MPs. TK Maxx and River Island also ceased online operations as health concerns mount. Mike Ashley’s Frasers Group issued an apology after he tried to keep Sport Direct stores open as an essential service and reportedly upped the price on a range of home exercise products by up to 50%.

Dividends

Many companies announced cuts or suspensions in dividend payments, as they prioritised balance-sheet strength over shareholder distributions. These included: Weir Group; ITV; IWG; Fuller's; Kingfisher; Marston's; Micro Focus International; McCarthy & Stone; William Hill; Shoe Zone; Flutter Entertainment; British Land; GVC Holdings; Intercontinental Hotels; JD Wetherspoon; Marks & Spencer; Travis Perkins; Crest Nicholson; Aggreko; Go-Ahead Group; Rightmove and Stagecoach.

Guidance

With the length and scale of disruption unclear, many companies withdrew their market guidance of profits and sale expectations. These included: Capita; Daily Mail & General Trust; Marshalls; Berkeley Group; Mitie; Countryside Properties; Morgan Sindall; and Intu Properties.

In the US guidance was withdrawn by companies including: Coca-Cola; Target; Twitter; Dell; GM; Whirlpool; Mastercard; and Gap.

Property

The UK housing market was essentially frozen on Thursday night by the Government after financial institutions said they could no longer cope. Unless the movers have exchanged contracts, the government said no-one should move home unnecessarily. Britain’s banks have already pulled hundreds of mortgages from the market, and there are talks that financial institutions are being “overwhelmed” by homeowners with unnecessary demands for payment holidays. A government spokesman said: “Home buyers and renters should, as far as possible, delay moving to a new house while emergency measures are in place to fight coronavirus.” This resulted in weakness in the shares of UK house builders, including Persimmon; Taylor Wimpey and Redrow.  

Energy

Global demand for oil could fall by 20%, as 3 billion people around the world live in lockdown, according to the International Energy Agency. Brent crude has been driven to record lows because of coronavirus eroding demand and the Russia Saudi Arabia price war.

Saudi Arabia started an oil price war after losing market share to rivals. The Arab state was reducing the amount of oil it pumped to try and keep a floor on prices, but this allowed Russia and US shale producers to steal its customers.  After the partial flotation of Aramco got away late last year, a significant reason for Riyadh to support oil prices at the expense of its market share has been removed. Saudi, the world’s lowest-cost oil producer, now wants its market share back – and the oil-price slump engineered by Riyadh is hitting the balance sheets of higher-cost producers in the West. This is creating rumbles through US high-yield bond markets, as 20% of the high-yield index consists of debt instruments issued by shale operators.

All of this meant there was little support for the oil price this week. Brent crude futures by 2.4% over the week by mid-session on Friday to trade at about $26 a barrel.

Mining

Anglo American warned of lower iron ore and coal production in response to the pandemic, as national governments imposed lockdowns on their citizens. A 21-day lockdown in South Africa is expected to reduce output of coal gold, manganese and other commodities, but surface mining of platinum group metals will continue. “This will allow smelters, which cannot be switched on and off abruptly, to remain operational,” the country’s minister of mines said. Mining makes up about 18% of South Africa’s GDP.

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