Financial markets continue to hang on two Vs: vaccine and virus
Global equities bounced strongly last week, gaining nearly 5 per cent and more than reversing their losses from the previous week. Stock markets ended the week at new highs and opened again higher yesterday.
The market correction ended up lasting no more than a week. “So too did the surge in GameStock which has fallen back as fast as it rose,” remarked Rupert Thompson, chief investment officer at wealth manager Kingswood in Moorgate.
“The quick market recovery almost certainly reflects the fact that there is still a considerable amount of money on the side lines waiting for any meaningful setback to add to equities,” Thompson told City PM this morning.
Global economic recovery
As long as hopes for a strong global economic recovery remain intact, any correction should be limited with markets largely ignoring the current weakening of the economic data, particularly in Europe and the UK, Thompson noted.
The Eurozone economy contracted 0.7 per cent in the fourth quarter and could see a further modest decline in the current quarter.
As for the UK, GDP will probably have seen a rise last quarter but the Bank of England’s latest forecasts show GDP shrinking as much as 4 per cent in the current quarter.
“This, however, represents a much smaller fall than seen last spring and the Bank is forecasting a strong recovery to start in the second quarter as the lockdown is relaxed,” he explained. “It left interest rates unchanged last week and rates now look likely to avoid being pushed below zero unless its growth forecast turns out to be wildly optimistic.”
Across the pond
The latest deluge of US data was rather mixed but overall painted a picture of a slowdown in US growth but no double-dip.
“Hopes of near-term resilience and a strong rebound over coming months are in the case of the US based both on the vaccine roll-out but also a very sizeable fiscal stimulus,” Thompson said.
There is no agreement yet between Democrats and Republicans on the size of the forthcoming package. “But there is no doubt a sizeable stimulus will be implemented in the next few weeks, hard on the heels of the one only agreed at year-end,” he added.
In the UK, by contrast, all the talk is already about how the government can start to bring the government’s finances back onto a more sustainable track.
In reality, however, Thompson is convinced Rishi Sunak may be forced in his budget on 3 March to extend government support measures still further and any tax increases will be limited.
“The government has decided to stick with its ‘triple tax lock’, namely the pledge not to raise rates of income tax, national insurance or VAT. This leaves any tax increases most likely confined to corporation tax, capital gains and pensions,” he said.
Vaccine rollout
Hopes of a sharp UK economic rebound therefore depend much more on a rapid vaccine rollout rather than new fiscal stimulus. And on this front at least, the UK is leading the way with 15 per cent of the population now vaccinated, while the US is lagging somewhat but it is the EU which is trailing significantly.
“While the economic data has been mixed of late, the earnings news remains very encouraging with Amazon and Google comfortably beating expectations last week,” Thompson said.
He pointed out that, with close to 60 per cent of large cap US companies now reported, earnings look set to end up 2 per cent on a year earlier versus expectations for a 10 per cent decline at the start of reporting.
“The oil majors have reported larger than expected losses but these have very much been the exception rather than the rule,” he noted.
Going forward, further gains in equities will have to be driven by increases in earnings rather than valuations.
“These positive surprises therefore are reassuring even if ultimately the path of earnings and the fate of the stock market continue to hang on the two Vs, the vaccine and the virus,” Thompson concluded.