Market Comment 27/05/2020

Markets continue to focus on the progress of Covid-19 and potential treatments/vaccines as well as the speed with which countries reduce lockdown restrictions. Only America could have something called ‘Operation Warp Speed’, their initiative to find a vaccine for the US population by next year.

Governments are now hitting an inflection point where the financial and social costs of protracted lockdowns are now seen as outweighing the medical risks. The narrative seems to be shifting towards ‘we’ll deal with second outbreaks of Covid-19 if and when they appear’ rather than ‘we’ll stay locked down for longer’.

From the economic policy maker’s perspective, central banks can keep cutting interest rates and flooding markets with liquidity, but ballooning government debt will potentially crowd out private sector investment. Economies need to get moving again in order to generate much needed tax receipts; witness recent disagreements between Chancellor Rishi Sunak and the Prime Minister on the pace of restriction-easing in the UK.

Equity markets remain in ‘glass half full’ territory as they concentrate on the positives. Flattening infection curves in the northern hemisphere and a belief that April probably marked the low point for economic data (as most countries in Europe as well as the US were locked down for the month) continue to fire this optimism. What we don’t know, however, is how quickly we will come out the other side of this and what lasting damage will have been caused.