The last month has once again seen steady rises in asset prices as the effects of both fiscal stimulus and monetary loosening filter through to markets. However, the outlook remains mixed and there is now a growing divergence in pricing across asset classes, with the bond market continuing to suggest low rates and low economic growth for a prolonged period, while the equity market is more optimistic. Massive intervention by central banks does cause disruptions and impacts on the ability of the market to price assets according to their expected risks and returns. Elsewhere, the extraordinary extent of the easing and continuing concerns around the health of the global economy have catapulted the gold price to an all-time high. The gold price is an indicator of investors’ desire for shorter term defensive, risk off assets, as well as longer term concerns over the value of money and inflation.
In the UK, the Chancellor revealed a “mini-budget” of interim stimulus measures. Rishi Sunak refrained from announcing too many policies, preferring to wait until the full budget in Autumn. The statement on 8th July included temporary cuts to stamp duty and targeted VAT relief for hospitality businesses aimed at getting the most impacted areas of the economy moving again. Several weeks on, there does appear to be some increase in housing activity and many restaurants are now open for business. However, with many hospitality companies surviving through the lockdown on grants and loans which are unlikely to be repeated, the next few months will be critical in determining if these are still viable businesses in the new environment. After trying for four months to keep people in their homes, there is now a clear effort by the government to get individuals out and spending again as the economy has overtaken coronavirus as area of primary concern.
The key area for the global economy and markets remains the United States. Infection rates continue to rise and jobless rates, which had been improving, have stalled. While a return to nationwide lockdown is unlikely, rolling local or state restrictions may continue for some time and will weigh on consumer and business confidence. Furthermore, the latest round of stimulus is locked in political standoff and the upcoming Presidential election is likely to only inflame current division and unrest. Resultingly, the US dollar, following many years of relative strength, is now weakening against peers, and has fallen to its lowest level since 2018. This has implications for the global economy and markets as US demand drives many countries exports, and the majority of commodities are priced in USD. For borrowers of dollars, a weakening trend should be a tailwind, and emerging markets have historically been beneficiaries of a weaker dollar. However, during such unprecedented times, and with so many other factors at play, this is by no means a certainty.
Finally, US-China tensions continue to escalate. The US order to close China’s Houston embassy and the expected retaliation by China added a new dimension to the hostility, which now appears to have lost any clear end goal. Some suspect that with the increasing probability of defeat for Trump at the Presidential election, China hawks in the US are attempting to burn as many bridges before a new Biden led administration. Regardless, the latest skirmish marks an escalation and willingness by the US to go further than they have previously. While additional measures are expected, they are likely to be met with further risk off moves by investors. Although, these have typically been short lived.