Before the Bell: Coronavirus mutation unsettles the market as London faces Tier 3
European markets underwent a rather mixed session yesterday, with the FTSE100 underperforming after it was announced that London and a good part of the south east of England was being put into tier 3 restrictions at midnight tonight, due to a new strain of the coronavirus which was spreading at a faster rate.
“This of course raises the very real concern that the vaccine might not be as effective, and while there is no evidence that it would be, the revelation of this new strain has added to the uncertainty in markets in the lead up to Christmas,” remarks Michael Hewson, chief market analyst at CMC Markets UK.
“While disappointing, the rise in infections is not a UK phenomenon, we’ve already seen Germany and France and the Netherlands extend their own harsher restrictions into next year, while at the same time being behind the curve in their own vaccination programs, which haven’t even begun yet,” Hewson tells City PM
Brexit progress
On the plus side we did see a marked improvement in sentiment over a renewed sense of optimism that the UK and EU might be able to bridge the gap that currently exists between them on the key elements of the level playing field and fishing, Hewson continued.
With the Irish foreign minister Simon Coveney saying that a deal was 90 per cent, done it would be absolutely extraordinary if the deal were to founder on the remaining 10 per cent, but as with anything the devil is in the detail.
“As stated previously the only deadline that matters now is the 31st December, though ideally, we would hope to see something tangible before Christmas to allow time for ratification,” Hewson said.
“After the year we’ve all had, amidst the pain and heartache that the virus has wrought, wouldn’t it be nice if hostilities were suspended on the altar of not inflicting more economic pain on top of the economic pain of coronavirus, and a deal agreed in time for Christmas.”
Across the world
US markets finished the session on a similarly mixed note, with all eyes on Capitol Hill and a possible stimulus deal, against a similar backdrop of cold weather, rising post-thanksgiving infection rates, and fears over even tighter restrictions, as the US death toll rose above 300,000.
In Asia the mood is slightly less pessimistic, but still downbeat on the back of the resurgence of coronavirus cases worldwide. On the plus side the Chinese economy has continued its solid rebound from its own Covid-19 crisis earlier this year, as well as the lack of a second wave there.
“The rise in cases along with the new strain looks set to translate into a slightly lower open here in Europe this morning,” Hewson said.
Earlier today we got the latest Chinese retail sales for November, he added, which have continued the resilience of the last three months. The lack of a second wave, as well as the Golden Week holiday and Singles Day helped November retail sales rise 5 per cent, the fourth successive monthly gain, and putting the Chinese economy on course for a much better end to the year than would have been thought possible only a few months ago. The rebound in consumer activity was primarily driven by sales of communications sales equipment like mobile phones, which rose over 40 per cent, as well as sales of motor vehicles which saw a rise of 11.8 per cent.
Despite the big improvement in consumer spending in recent months, Chinese retail sales still remain below the levels we saw at the end of last year, when they were at 8 per cent, and they are still down 4.8 per cent, year to date.
Industrial production also stayed resilient; it was already back at pre-pandemic levels at 6.9 per cent, in October, coming in at 7 per cent, and the best levels since March 2019
Euro markets today
Markets here in Europe look set to open slightly lower as we look ahead to a day of significant UK economic data. “The upcoming tightening of restrictions across London and the South East, are another hammer blow to the ailing hospitality industry, with today’s latest unemployment numbers set to be one of many sobering signposts of the economic damage caused by Covid-19 over the next few months,” Hewson noted.
Even before yesterday’s announcement of tighter restrictions the outlook for UK unemployment had started to look much bleaker in recent months, with some notable increases in the last three months or so.
Since July we’ve seen a big jump from 4.1 per cent to 4.8 per cent in September, as Hewson explained this is likely to continue to rise for several months to come, with another jump to 5.1 per cent for the 3 months to October expected in the next hour or so.
In the latest spending review Chancellor of the Exchequer Rishi Sunak forecast that unemployment could well peak in the second quarter of 2021 at 7.5 per cent, and to that end the Chancellor said that he would put aside £3bn to deliver a new 3-year restart program for those longer term unemployed, in order to try and get them back into work.
“While this is very welcome, along with the furlough scheme which has now been extended into March it is likely to have come too late for a lot of people in vulnerable jobs, given that a lot of employers decided to make a start on reducing headcount when the November lockdown was announced,” Hewson said.
“This could well accelerate further in the coming months given yesterday’s announcement of tier 3 restrictions for most of London and the South East,” he added.
“Unless further help is forthcoming over the next couple of months, for some of these ordinarily solid businesses, we may well find that when we finally come out of the other side of this dystopian nightmare that a good number of these businesses may well not be around for us to enjoy,” Hewson remarked.
“In which case we could well see a further acceleration of the headline rate after Christmas and New Year as the jobless rate continues to rise, vaccine or not,” he concluded.