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Last Week in the City: Unemployment soars

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (30 March to 3 April 2020).

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (30 March to 3 April 2020).
Garry white employee

by
Garry White

in Features

03.04.2020

Markets continued to be roiled by the spread of the novel Coronavirus (Covid-19), with the US now becoming the epicentre of the outbreak. Unemployment rose significantly in America over the last two weeks, with a sharp rise in people applying for the universal credit benefit in the UK too.

It remains unclear how long lockdown measures will last – or whether they will need to be tightened. This means the squeeze on business cashflow will continue for an undeterminable period. Individuals and companies are going to need help from governments to get through this period and it likely that there will be a significant rise in debt ahead – for governments, companies and individuals.

Over the week, the FTSE 100 fell 1.6% by mid-session on Friday and the FTSE 250 lost 3.1%.

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A business and market development update from our Chief Executive, Paul Abberley can be found here.

Markets in general

Over the last two months, the mood in the market has shifted from complacency to denial, then to despair followed by hope. Jon Cunliffe, Charles Stanley’s Chief Investment Officer, looks at the sharp shift in sentiment over the last month here.

Credit ratings agencies such as S&P Global, Moody’s and Fitch have downgraded corporate credit ratings at the fastest rate on record. More debt issuers will see their rating reduced in the weeks ahead, the agencies noted.

Bulls can take comfort from the scale of the interventions which have prevented a worse rout in markets. Bears will argue that this scale of intervention cannot be sustained. John Redwood looks at the current market complexities here.

Employment

Unemployment is rising rapidly around the world as companies lay off or furlough staff to cope with their cashflow crises. The most significant rise has been seen in the US, with Goldman Sachs predicting that unemployment in the world’s largest economy could hit 15% this quarter.

More than 6.65 million people filed for unemployment benefits in the US last week. Some 3.3 million had filed the previous week, bringing total claims to 9.95 million for the last two weeks alone. This means that more US citizens have filed for unemployment benefits in the last two weeks than in the prior ten months.

Unemployment in the UK could double in the next few months, according to some economists. Despite the government’s attempts to incentivise employers to keep staff on, investment bank Nomura predicts the effect of the pandemic will hit “multiple times that of the global financial crisis.” Claims for the universal credit benefit in the UK has surged to 950,000 since the lockdown began.

Economics

The economic fallout from the Covid-19 outbreak is now expected to be severe. There will be an explosion in government debt issues around the world, as tax income contracts rapidly and state spending surges. John Redwood looks at the looming debt explosion here.

Nomura predicted a 13.5% drop in UK GDP in the second quarter, which is more than six times the biggest quarterly fall during the 2008 crash. However, a partial recovery in the third quarter is expected.

In an indication of the rapid changes seen in just a few weeks, Fitch Ratings changed its 2020 view on the global economy to “deep global recession” from slow growth in just 10 days. “The speed with which the coronavirus pandemic is evolving has necessitated another round of huge cuts to our [GDP] forecasts,” Fitch said in a research report. The credit rating agency said it now expects world economic activity to decline by 1.9% this year. On March 22, Fitch had projected global GDP growth of 1.3%.

Eurozone business activity collapsed last month as attempts to contain the pandemic pushed governments across the continent to shut down vast swathes of their economies. IHS Markit’s final Composite Purchasing Managers’ Index plummeted to a record low of 29.7 in March from February’s 51.6. This was lower than the flash reading of 31.4 and was by far its biggest one-month drop since the survey began in July 1998. Any reading below 50 indicates contraction. The figures for Italy were shocking. The IHS Markit Business Activity Index for services dived to 17.4 from 52.1 in February. The UK services sector suffered its steepest decline for more than two decades. The reading from HIS Market came in at 34.5 for March, below initial readings of 35.7 and down from 53.2 in February.

The EU has announced relaxations of state aid rules to allow member states to direct cash to businesses in trouble or needing financial support to carry employee costs when they are short of revenue. John Redwood looks at the political response to the crisis here.

China will slash the amount of cash that small and medium-sized banks need to hold as reserves, to help pump more liquidity into its economy. The People’s Bank of China is now expected to cut the reserve requirement ratio by a total of 100 basis points, split between April and May.

Dividends

Britain’s largest banks agreed to scrap nearly £8bn worth of dividends, giving them an additional firepower to lend to companies hit by the Covid-19 lockdown. The move was mandated by the Prudential Regulatory Authority (PRA), the body appointed by the Bank of England to supervise the banking system.

Many other companies decided to preserve cash and limit shareholders payments to get them through the crisis. Charles Stanley expects this process will continue and the outlook for income from equities has clouded significantly. Garry White looks at the negative outlook for dividends here. John Redwood also notes that the effects of Covid-19 mean the future for dividends is now uncertain here.

Industry bailouts

The first airline bailout may be announced soon. Air France-KLM is reportedly in talks with banks about securing a multi-billion-euro loan package backed by both the French and Dutch governments. Air France may get as much as €4bn euros in French-guaranteed loans while KLM could get close to €2bn backed by The Hague, Reuters reported, citing sources. Earlier in the week, the International Air Transport Association (IATA), which represents 290 global airlines, warned that 75% of airlines only had enough funds to cover – at most – three months of unavoidable fixed costs. After which, they face liquidation without government support, the trade body noted. However, it also said that 10% of airlines could withstand the current situation for another six months (assuming that the crisis abates by June) and that a small minority more are capable of withstanding zero cash inflows for more than six months.

UK bus journeys operated by FirstGroup and Go-Ahead have collapsed by 90% since the pandemic began. Both groups welcomed a "crucial" £400m government bailout announced on Thursday.

More industry bailouts are expected.

Energy

The cost of oil has fallen to lows not seen for almost two decades, as Russia and Saudi Arabia slashed prices and ramped up production in a fight for market share. Those moves, alongside the wider collapse in demand, resulted in the US crude price having its worst quarter on record. Prices fell by two thirds in the first three months of the year. At the end of the week, Donald Trump tweeted that Riyadh and Moscow may be close to an agreement to support prices, sending the price sharply higher, but whether this would actually occur remains unclear.

Low oil prices are damaging the US shale sector, with Whiting Petroleum filing for Chapter 11 bankruptcy protection on Wednesday, becoming the first sizable fracking company to succumb to the crash in oil prices.

Socially Responsible Investing

Covid-19 is making more people think about socially responsible investing. Rob Morgan takes a look at why here.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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