Market Comment 15/06/2020

Last week represented the first test of global equity markets since late March, with major indices falling by around 5%.  To put this into context, share prices have rebounded in virtually a straight line since bottoming out on 23 March.  Before this sell-off, the FTSE All-World Index had recovered by over 40% from its 2020 lows, and the US market had moved into positive territory for 2020.  Indeed, some household names in the technology space such as Amazon, Apple and Microsoft saw their share prices hit all-time highs in the middle of last week.

So what prompted the latest market wobble?

Markets have focused recent attention on improvements in the transmission rate of Covid-19 and the subsequent easing of lockdown restrictions in many countries.  Although the economic data is grim at the moment. much of it relates to the period of maximum lockdown in March/April.  Recent indicators from countries which have started to open up their economies again have shown an improvement in economic prospects, leading to optimism that the worst is over.  The faster economies open, the quicker the recovery.

While this undoubtedly true, the risk is that too speedy a reopening triggers an increase in coronavirus cases.  Indeed, some states in the US, notably Arizona, the Carolina and Texas have seen a recent spike in hospitalisations possibly associated with Memorial Day celebrations.  Meanwhile, there has been a fresh outbreak of cases in Beijjing after a long period of no recorded cases.  This has thrown the trade-off between the social and economic consequences of prolonged lockdown versus the health risks of too early a relaxation of restrictions into the spotlight,  From a market perspective, the fear is that a resurgence of Covid-19 cases will lead to a resumption in lockdowns, thus jeopardising any economic recovery.  Hence, last week’s sell-off.

The dilemma facing governments is particularly evident in the UK.  Health advisers are still recommending caution in terms of relaxing restrictions, while there is pressure from MPs, as well as from business groups, to ease more quickly, particularly with regard to the two-metre social distancing rule.  However, as UK Chancellor Rishi Sunak said on Andrew Marr’s show on Sunday, ‘advisers advise, but governments make policy, and we should be held accountable for that.’  The message seems fairly clear.