Despite it being August, a typically quiet month as many take their 2-week summer holidays, there is actually a lot going on. Economic data published last week was disappointing for continental Europe as it suffers second waves of the virus that threaten further damage to the recovery. Brexit talks have run into the sand but we find some good news for the UK, where both the economy and the fight against the virus seem to be going well. Over in the US, the White House and Congress continue to wrangle while their economy burns.
Global levels of infection remain high. For South Korea, once a beacon of success in the fight against the virus, considering whether to go back into lockdown would seem to be nothing but bad news. The policy of suppressing the virus is clearly failing. And this would be bad news for society, for the world economy and stock markets but for one thing – the chances of a successful vaccine remain good. And if it’s the Oxford vaccine that is successful, a jab could be on it’s way to half the population in the UK as early as next month. That really would be a game changer.
A closer look at virus and economic data in Europe
Last week saw the publication of the Purchasing Managers’ Indices (PMIs) in Europe. They fell back heavily suggesting that, after the initial surge in pent up demand as lockdowns were eased in late spring, the pace of recovery has slowed. And those second waves seem to be closely related to pent up demand from Europe’s citizens for a holiday. All that increased social interaction means that France is now suffering nearly 5,000 cases a day.
The UK is generally seen to have performed badly in the fight against the virus with one of the highest death rates in the developed world, and has also had the biggest fall in GDP of any major economy. But now, our daily cases are low and stable, and early focus on outbreak clusters, such as the one in Leicester, has suppressed the virus even as national lockdown easing leads to a gradual increase.
As well as good news on the virus, the UK PMIs jumped last week to 60 (above 50 signals expansion). One of the strongest in the world. And just as high frequency data forewarned the setback in Europe’s PMIs, so it supports the idea that the UK is recovering rapidly from the deep recession. The last fiscal package with deals on restaurant meals and a cut in VAT are giving a huge boost to the hard-hit restaurant sector. Of course, the winding down of the furlough scheme and the end of rent holidays pose massive challenges. But the UK recovery is undoubtedly getting off to a strong start.
Brexit talks stall but the potential for vaccine success accelerates
We could do with some good news for the UK as there are signs that Brexit talks are foundering, and Boris Johnson might decide to opt for No Deal. This is crunch time, as if there’s no agreement by October, there won’t be time for a deal to be ratified in Europe. We still think they’ll do a deal but expect some negative press in the next week or two.
We also believe that the Oxford vaccine trials show that it is effective in giving protection from the virus. We already know that it is safe and produces both T cells and antibodies. The news that the UK will have 30 million doses next month, which is two months ahead of the previous target, is testimony to the ease with which it can be mass produced. And Donald Trump is hoping to take delivery of an even bigger order in October. In the nick of time to begin a mass vaccination programme before the US elections on 3rd November. Of course, all this is predicated on the success of the trials, and approval from the medical authorities. Remember that a vaccine is given to entire populations of healthy people, so the bar for regulatory approval is high.
Risk assets look set to benefit; ongoing support for bonds will wane
This all leads us to remain positive on risk assets, and cautious on bonds. Central banks are likely to keep interest rates low for an extended period, but the special measures, such as the extra monetary support, that have pushed bond yields to exceptionally low levels, will gradually come to an end, and further rate cuts should be unnecessary.