Client Update - 2nd October 2020
Client updates can sometimes need a little last-minute alteration should a major news story break overnight – today is one such example. News broke late last night that President Trump was self-isolating after his aide Hope Hicks tested positive for Covid-19, followed by the news early this morning that both the President and First Lady had also tested positive. The news adds another layer of uncertainty to the upcoming Presidential election, which is just 32 days away. The announcement has prompted a flight to safety this morning with European markets lower, Gold and the US dollar slightly higher and US equity futures initially down 1.6%; at the time of writing they are now down 1.2%. The moves this morning may undo what has been a reasonably positive week of markets moving higher despite ongoing concerns over the pandemic, increasing restrictions on activity and a lack of concrete news on a stimulus package in the US.
The President’s positive Covid-19 test comes just two days after the first TV debate between the two candidates, though to describe it as a ‘debate’ arguably overstates what could probably be better described at two old men shouting at one another. The 90-minute session saw repeated interruptions and insults thrown and very little in the way of new information or substance. President Trump reiterated his assertion of widespread voter fraud when asked if he would respect the results of the election. Opinion polls published after the event suggested that Joe Biden had marginally ‘won’ the debate though data published by Deutsche Bank highlighted that history shows that the TV debates and their outcomes actually have very little bearing on the final result and with opinions in the US already so polarised this debate is unlikely to have shifted sentiment greatly.
Elsewhere in US politics, despite optimistic noises from both sides, we still await anything concrete on another round of fiscal stimulus with what appears to be still a substantial gap between the two sides in terms of how much the next package should be. While the Covid-19 diagnosis of the President may spur Congress to be seen to be ‘doing something’, the $2.2 trillion package approved yesterday by the Democrat-controlled House is unlikely to make any progress in the Republican controlled Senate given the Republican party being ‘uncomfortable’ with any stimulus over $1 trillion, meaning that even the $1.6 trillion proposal from the White House may struggle to be approved. With Congress going into recess next week ahead of the election, there are risks that if the momentum in talks this week fails to deliver a stimulus package, the US economy will be unlikely to see any further fiscal stimulus until well after the election takes place.
COVID-19 continues to generate plenty of headlines outside of the overnight news from the White House with the global death toll passing 1 million, described by UN Secretary General Antonio Guterres as "an agonising milestone”. We have seen continuations or increasing restrictions on activity across Western Europe including lockdowns in large parts of Spain and further restrictions imposed in Wales and the north of England, while London has been described as being at a “tipping point”. At home, the Prime Minister said that more restrictions could be imposed with chief scientific advisor Patrick Vallance saying the virus is "not under control ". The Prime Minister said that "if the evidence requires it, we will not hesitate to take further measures that would, I'm afraid, to be more costly than the ones we have put into effect now”. This warning did not match news from the Office of National Statistics survey that said the UK “R” rate had fallen from 1.7 to 1.1. All rather confusing.
What is positive is that the UK is not even close to tracking the scenarios described by Chris Witty and Patrick Vallance last week. We are still waiting patiently for positive news on vaccines, though the CEO of Moderna, whose vaccine is in phase 3 trials in the US, attempted to manage expectations on the speed of rollout of the vaccine, saying that his company will not be ready to seek emergency authorisation from the US FDA until November 25 at the earliest and is does not expect full authorisation until the spring of 2021. The comments contrast with the language of the White House where the President was clearly hoping to announce a vaccine ahead of the election.
There appeared to be some optimism yesterday that the ninth round of Brexit negotiations that conclude in Brussels today had made some progress though Chief EU negotiator Michel Barnier is expected to insist on meaningful advances in the key outstanding areas around fisheries and state aid before agreeing to enter into what is known as a ‘ tunnel’ – several weeks of intense talks aimed at concluding a deal. The hope was that these talks would take place in the run-up to the European Council on the 15th October but it appears the British proposals tabled this week on some of the outstanding areas including fisheries and state aid offered little new detail however. The talks have taken place against the backdrop of ongoing tensions over the UK's Internal Markets Bill which passed its second reading in the House of Commons this week and is now the subject of legal proceedings with the European Commission sending a ‘letter of formal notice’ to the UK yesterday. This represents the first stage of infringement proceedings as set out in the Withdrawal Agreement and could lead to a case being heard at the European Court of Justice. European Commission President Ursula von der Leyen said that "our UK friends intend to break the Withdrawal Agreement with the Internal Market Bill. We have given them one month to withdraw the relevant parts and this has not happened”. After the talks conclude today, the Prime Minister is due to speak to Ursula von der Leyen via videoconference tomorrow, with the timetable becoming increasingly tight, but not impossibly so, for a deal to be concluded in time to ensure the legal process for the treaty and ratification can be completed before the end of the year.
Economic data has been dominated by manufacturing data this week which was broadly in line with the flash data we were issued the week before. Markets moved forward on this news and the numbers, especially in China, highlight a decent recovery in the manufacturing sector of the global economy, however, the likely weakness we see in the PMI services data published next week reminds us that this is a somewhat unbalanced recovery so far with certain sectors still lagging significantly particularly in the travel, tourism, leisure and hospitality arenas.
The economic fallout from the pandemic continues, with significant disparities in how certain sectors within the global recovery are recovering, though a degree of comfort can be taken from the ongoing monetary and fiscal support which is likely to remain a feature for some time to come. Political risks are elevated given what could be a tight election outcome in the US, possibly even a contested one should Trump lose and declare the result void, while the UK has only a few weeks to find a compromise deal with the EU ahead of the end of the Brexit transition period. The news overnight from the US with the President testing positive for Covid-19 only adds to the sense of uncertainty. In the absence of knowing how these issues will unfold, investor sentiment has softened, and this suggests that equity markets may be unable to make a great deal of progress until there is more certainty on a number of fronts over the coming months. As ever, when opportunities present themselves, we will act on our investor’s behalf.