Review of the Week: No love lost

This year Valentine’s Day was clouded by news of Chancellor Sajid Javid leaving Number 11 and the ongoing spread of coronavirus around the globe. But the markets took it all in their stride, notes chief investment officer Julian Chillingworth.

As the Prime Minister sipped his early Friday morning coffee, he may have reflected, on the 125th anniversary of the first performance of Oscar Wilde’s The Importance of Being Earnest, on Lady Bracknell’s memorable lines. To misquote Mr Wilde: “To lose one Chancellor Mr Johnson is unfortunate, to lose two looks like carelessness”.

It’s rumoured neither Mr Johnson nor his chief adviser, Dominic Cummings, had much time for outgoing Chancellor Mr Sajid Javid, and both have a great deal of respect for his replacement, Mr Rishi Sunak. Mr Javid was determined not to bow to the Prime Minister’s calls for him to sack his team of advisors, a stance which ultimately led to his resignation last week.

There’s creeping signs of a shift of power between the Prime Minister and the Treasury. Previous Chancellors have wielded tight control over government domestic policy, but under Mr Javid, the Treasury was weaker than it’s been for years. There’s always been a clear distinction between Numbers 10 and 11, but the new plan is to create a joint unit of special advisers to service both. By accepting the job Mr Sunak has accepted No. 10’s sovereignty over the Treasury, marking the start of No. 11’s metaphorical transition into No. 10a and consolidating No. 10’s hold over policy.

Despite these shifting dynamics, markets took the departure of Mr Javid with some equanimity and sterling has held steady at around $1.30. Investors are expecting a No. 10-lead simulative budget which boosts fiscal spending and growth: not necessarily what the outgoing Chancellor has in mind. It looks like the construction industry will be one of the first to benefit from any boost to spending as it was finally decided that HS2 will definitely go ahead, bringing extra cash to a number of areas outside of London.

Only time will tell how this new political relationship will work over the long term. Mr Sunak may turn out to be less of a passive player in the Johnson-Cummings axis than they expect, particularly as the Prime Minister’s credibility in his own party and the financial markets would come under pressure if another Chancellor was fired in short order.

Index

1 week

3 months

6 months

1 year

FTSE All-Share

-0.2%

3.4%

7.7%

9.6%

FTSE 100

-0.5%

2.2%

5.5%

7.7%

FTSE 250

1.4%

8.2%

17.8%

18.8%

FTSE SmallCap

0.1%

9.7%

13.0%

13.7%

S&P 500

1.0%

8.2%

11.1%

22.6%

Euro Stoxx

-0.2%

2.9%

6.6%

16.3%

Topix

-2.0%

-0.8%

3.0%

9.0%

Shanghai SE

0.9%

-0.4%

-3.2%

2.2%

FTSE Emerging

0.6%

5.0%

6.0%

8.9%

Source: FE Analytics, data sterling total return to 14 February

Under the cloud of coronavirus

Valentine’s Day in China was an unfortunately sombre affair this year under the cloud of coronavirus. Cities are under lockdown and most wining and dining will have been restricted to the family kitchen. Coronavirus dominated headlines again last week and concerns about a global pandemic are still doing the rounds. The virus will weigh on business sentiment and economists have slashed their growth forecasts for China. If factories stay shut for longer than currently expected, these forecasts will be downgraded even further.

The total confirmed number of Covid-19 cases in China has risen to over 70k, and the number of fatalities to 1,770 - a number far higher than those killed by 2003’s SARS outbreak. But there’s scepticism around the accuracy of the stats so it’s hard to predict the severity and duration of the epidemic. Experts have accused Chinese authorities of underreporting the outbreak and the reliability of the testing kits is seriously under question.

If we don’t know the proper stats, we can’t precisely anticipate how long-term global growth is going to be affected. If the Chinese authorities can keep the contagion under control in the next few months, economic activity should recover fairly quickly. The longer the outbreak continues, the greater the economic woe. Investors could remain jittery until the numbers start to level out.

Chinese authorities are undoubtedly aware of the potential impact on the domestic economy and have shown their support by cutting rates a tenth of a percent to 3.15% and adding reserves to the banks. Further policy support is likely in the short term, as is more market volatility, but ultimately stimulus efforts should be helpful for global growth.

Other economic side effects include a surge in demand for online purchases, a result of all that time spent at home. Sadly this demand will struggle to be met as stock dwindles in closed factories and we believe core ecommerce sales could turn negative in the first quarter of the year. But there is at least one silver lining: some of the unfulfilled demand in this quarter will be deferred rather than lost, while the crisis may drive a further shift in consumer behaviour to online purchases.

There’s an assumption in the markets that the recovery will be similar to the 2003 SARS outbreak, when there was a very strong bounce once the number of cases declined. But never assume anything; that was in a period of much stronger global activity and a smaller Chinese economy. Both the economic and market recoveries this time may turn out to be more pedestrian.

Bonds
UK 10-Year yield @ 0.63%
US 10-Year yield @ 1.59%
Germany 10-Year yield @ -0.41%
Italy 10-Year yield @ 0.91%
Spain 10-Year yield @ 0.29%
 

Economic data and companies reporting for week commencing 17 February

Monday 17 February

UK: Rightmove February house prices
Full-year results: HSBC
Quarterly results: BHP Group

Tuesday 18 February

US: February Empire State manufacturing index, NAHB housing market index
UK: December unemployment rate
Germany: February ZEW business survey
Full-year results: Anglo American, InterContinental Hotels Group, Glencore

Wednesday 19 February

UK: January CPI and PPI
US: January building permits and housing starts
Full-year results: RPS, Hochschild Mining

Thursday 20 February

US: February Philly Fed business survey, January leading indicators
UK: January retail sales, February CBI survey
EU: February consumer confidence, German GfK consumer confidence
Full-year results: Rathbone Brothers, BAE, Spectris, McBride, Moneysupermarket.com Group, Lloyds Banking Group, Smith & Nephew, KAZ Minerals, TBC Bank Group
Preliminary results: Morgan Sindall Group
Quarterly results: Hays

Friday 21 February

Global: Preliminary February purchasing managers indices for manufacturing
EU: February Belgian business confidence
US January existing home sales
Full-year results: Pearson

Total votes: 33

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