VIX sees largest 2-day move since 17 March highlighting the fragility of the market and how fast sentiment can change from positive to negative.
Bank of England governor Andrew Bailey has warned that Britain’s economy will suffer longer-term damage from the current coronavirus shutdown.
But speaking at a webinar organised by the Financial Times, Bailey warned that there’s much uncertainty over how severe it will be. We don’t yet know whether the BoE’s scenario of a 25% plunge in the current quarter is too pessimistic, or too optimistic.
Bailey also sounded cool about cutting UK interest rates into negative territory. He didn’t rule it out, but called it a “very big step” which would require “an extensive communications exercise.”
(Thanks to Reuters for the quotes).
Donald Trump also told Fox News that “I’m very disappointed in China.”
This isn’t helping the mood in the markets, where the FTSE 100 index is now down 145 points or 2.5% at 5757.
Heads-up. Donald Trump has fired another warning shot at China.
The president has told Fox News he’s ‘looking at’ Chinese companies who are listed on the US stock market, but don’t follow US accounting rules.
He also weighed in on currencies, saying:
“Right now it’s good to have a strong dollar. Right now having a strong dollar is a great thing.”
“I call it a transition to greatness. You’re going to have the third quarter….That’s a transition quarter. We’re going to do well in the fourth quarter, and I think next year, with all of the stimulus, all of the things we’ve done, I think we’re going to have one of the best economic years we’ve ever had”
A social distancing sign at Heathrow Airport, in Britain Photograph: Neil Hall/EPA
The owner of British Airways will press ahead with cutbacks that could see up to 12,000 jobs lost, its boss Willie Walsh has said, despite the government’s extension of the furlough scheme.
In a letter to transport committee chair Huw Merriman MP, Walsh said government support to pay wages would not compensate for “the reality of a structurally changed airline industry in a severely weakened global economy.”
“I want to confirm therefore that we will not pause our consultations or put our plans on hold.”
The comment is an apparent response to Merriman’s appearance in the House of Commons earlier this week when he called on British Airways to “put these redundancy plans back in the hold where they belong”.
US hedge fund manager Kyle Bass added to the gloom yesterday, by predicting that America’s economy will shrink 10% this year — effectively a depression.
Kyle Bass made his name betting against the U.S. housing market more than a decade ago, and today he is predicting an economic contraction that could be more than three times as severe as that suffered during the Great Financial Crisis.
“For the year I think you’re going to see U.S. GDP down somewhere between 7% to 10% in real terms,” as a result of the COVID-19 pandemic and the government’s efforts to contain the spread of the virus with business shutdowns, and “10% is an economic depression,” said the founder of hedge fund Hayman Capital Management, in an interview.
The sell-off is gathering pace, with the FTSE 100 now down 131 points or 2.2% at 5772 [still the lowest since 5th May].
Almost every stock has fallen, including financial stocks like Legal & General (-5%) and Barclays (-4%), property companies Land Securities (-4.3%) and Persimmon (-4.5%), as well as travel firms like IAG (-4.7%).
Investors seem to be concluding that the world economy will struggle to shake off the lingering impact of the pandemic. Hopes that economic growth might rally later this year, boosting revenues and profits, are fading.
Seema Shah, chief strategist at Principal Global Investors, sums up the problem:
There are some sectors which may be facing a prolonged period of weakness. Aviation being perhaps the most obvious example. In recent weeks, several airlines have announced that they do not expect to resume normal operations until 2022 and Boeing, the aviation bell weather, expects it to take five years and anticipates the failure of at least one major airline.
Similarly, with retail having to comply with social distancing measures for the foreseeable future, this sector also faces serious challenges. In the UK, an Ipsos Mori survey found that almost 50% of Britons would feel uncomfortable shopping, other than in supermarkets, and the British Independent Retailers Association has forecast that up to 20% of smaller shops may not even reopen once government support schemes begin to fade. Even after lockdowns are lifted, market participants should anticipate a wave of business failures across many sectors and across countries.
Unfortunately, the fallout from struggling businesses does not just stop there. Bankruptcies create negative feedback loops, particularly for the labour market. Consider this: as we hear of more and more businesses contemplating closure, there are potentially millions of currently furloughed people who will not be reemployed. A second wave of job losses is perhaps in the cards.
And therein lies the problem. Markets may be right to look through Q2 numbers and look forward to a Q3 recovery. But it is entirely possible that there will be a Q4 reckoning, where a second wave of job losses & prolonged period of business failures tests equity sentiment.
Lloyd’s of London, the world’s biggest insurance market, has predicted that Covid-19 will cost insurers more than $200bn, putting it alongside the worst disasters of recent years.
My colleague Joanna Partridge explains;
Lloyd’s expects to pay out between $3bn (£2.4bn) and $4.3bn (£3.5bn) to its customers due to the coronavirus pandemic, as it warned of a $203bn hit for the entire industry.
Insurance companies around the world have suffered losses as widespread government shutdowns have prompted claims for business closures, and halted travel and events.
The scale of payouts to customers forecast by Lloyd’s this year are equivalent to other big claims years for insurers, such as the aftermath of 9/11, when Lloyd’s paid out $4.7bn, and in 2017, when hurricanes Harvey, Irma and Maria caused widespread damage and loss, leading to $4.8bn in payouts.
Just in: Many UK firms fear they don’t have enough cash to survive a lengthy period of Covid-19 disruption.
That’s according to the Office for National Statistics, which just released its latest findings on the economic and social impact of the pandemic.
It says:
Of UK businesses that responded to our fortnightly Business Impact of Coronavirus (COVID-19) Survey (BICS) for the period 20 April to 3 May 2020, 44% of businesses who had not permanently ceased trading between 20 April and 3 May reported that their cash reserves would last less than six months.
Many UK firms say they don’t have enough cash reserves to survive a long period of Covid-19 disruption Photograph: Office for National Statistics
The ONS also found that 91% of businesses who had paused trading applied for the Coronavirus Job Retention Scheme, to cover the pay of furloughed workers, compared with 72% of businesses who were still trading.
And less than 1% of firms said they had permanently ceased trading during the period 20 April to 3 May 2020.
The International Energy Agency (IEA) has slightly raised its forecast for oil demand this year a little, as economies start to lift lockdown restrictions.
The IEA now expects demand to fall by 8.6 million barrels per day in 2020 — up from 9.3m bpd before, but still a record decline.
Javier Blas (@JavierBlas)
DEMAND HIT: @IEA has revised upward its forecast for demand, saying peak consumption destruction in April was probably ~25m b/d (rather than ~29m b/d estimated in last month’s report). For the whole year, it sees an average -8.6m b/d drop (rather than -9.3m b/) #OOTTpic.twitter.com/g4j4nEMHDd
But the agency also warns that a second wave of Covid-19 infections would trigger more economic disruption, saying:
“Economic activity is beginning a gradual-but-fragile recovery. However, major uncertainties remain. The biggest is whether governments can ease the lockdown measures without sparking a resurgence of COVID-19 outbreaks.
Recession anxiety has pushed the pound down to a five-week low against the US dollar.
Sterling dropped below $1.22 for the first time since April 7th, as traders moved into safe-haven currencies.
A WH Smith store sign. Photograph: Phil Toscano/PA
High street and travel hub retailer WH Smith has reported that its sales were pretty much obliterated last month, under the lockdown.
Total revenues in April fell 85% compared with a year ago, including a 91% plunge at airports and railway stations where most outlets are closed. High Street revenue dropped 74%.
But there are positives. WH Smiths’ online businesses “performed strongly”, with a 400% jump in book sales in the last month. The company is also still operating 130 stores in hospitals across the UK.
Plus, plans are “on track” for a phased re-opening of stores.
But still…. CEO Carl Cowling warns:
Since March, we have seen a significant impact on our business as a result of Covid-19, with the majority of our stores closed around the world.
Federal Reserve chair Jerome Powell gave investors a ‘dire warning’ about the economic prospects yesterday, says John Velis, strategist at BNY Mellon.
Velis writes:
In short, Powell is warning of a long, drawn-out recession, where productivity, income, and employment growth stagnate and where entire businesses and industries are wiped out and debt mounts “for years to come”. This is a dire risk, and one which Fed policy tools cannot do much to address without an assist from fiscal policy.
The Fed had been content to “let the economy run hot” during the economic expansion. In recent years Powell frequently hailed the progress made in getting lower-income and previously marginalized members of society into the labor force.
This was clearly a priority for him and a point of pride during the expansion, and today he lamented the fact that the economic and personal effect of the current crisis “has fallen most heavily on those least able to bear it”. Citing a soon-to-be-released New York Fed study, he pointed out that 40% of households earning less than $40,000 per year had incurred job losses.
This chart from BNY Mellon also shows how the pain of Covid-19 isn’t being shared equally:
Photograph: BNY Mellon
Fears of a protracted global downturn have dragged Britain’s blue-chip stock index to its lowest point in over a week.
British Airways owner, IAG, down 4%. Intercontinental Hotels has lost 2.7%, as has Whitbread (owner of Premier Inns).
European stock markets, May 14 2020 Photograph: Refinitiv
This leaves the FTSE 100 at 5827, down 1.3%, which is its weakest since Tuesday 5th May.
The FTSE 100 over the last quarter Photograph: Refinitiv
As well as Covid-19, investors are also fretting that the US-China trade war could resume.
US president Donald Trump fuelled these fears yesterday, with this tweet:
Donald J. Trump (@realDonaldTrump)
As I have said for a long time, dealing with China is a very expensive thing to do. We just made a great Trade Deal, the ink was barely dry, and the World was hit by the Plague from China. 100 Trade Deals wouldn’t make up the difference – and all those innocent lives lost!
We just about managed to cope with a downbeat assessment from Fed Chair Powell but couldn’t after additional evidence that the US/China relationship is souring further.
This [Trump’s tweet] was followed by China Global Times headlines saying that China is “extremely dissatisfied” with the possibility of the US sanctioning or otherwise punishing China over the coronavirus epidemic and would look to retaliate and were “mulling punitive countermeasures on US individuals, entities and state officials like Missouri’s attorney general, who filed lawsuits against China in seeking damages over the coronavirus pandemic.”
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Worries over the human and economic cost of Covid-19 are continuing to dog the markets today.
US Federal Reserve chair Jerome Powell gave investors a jolt yesterday, when he warned the US risks a ‘prolonged recession’, and an “extended period” of weak economic growth.
Powell’s prognosis is a blow to any lingering hopes of a V-shaped recovery — the road back from this pandemic is going to be rather bumpier.
The Fed chair also warned that governments may need to spend even more to protect their economies – on top of the huge stimulus packages already laid out.
Mark Haefele, CIO at UBS Global Wealth Management, fears this call may not be heeded.
Powell called for further fiscal stimulus to help offset the economic fallout from the pandemic, but ruled out pushing US interest rates into negative territory. Given ongoing partisan tensions in Washington, the additional fiscal stimulus Powell called for seems unlikely to immediately materialize.”
His warning came hours after we learned Britain had suffered its biggest monthly decline in GDP on record, with UK GDP shrinking by almost 6% in March.
Health experts are also expressing caution against assuming that life can return to normal soon.
Overnight, the World Health Organisation warned that coronavirus “may never go away”. Their emergencies chief, Michael Ryan, said:
“It is important to put this on the table: this virus may become just another endemic virus in our communities, and this virus may never go away.
I think there are no promises in this and there are no dates. This disease may settle into a long problem, or it may not be.”
Stocks in the Asia-Pacific region have fallen back, with Japan’s Nikkei 225 and Australia’s S&P/ASX 200 both down 1.7%, after Wall Street dropped over 2%.
European market have opened lower too, with the FTSE 100 shedding another 82 points to 5821.
The global risk sell-off is picking up momentum on worries that the post-coronavirus economic recovery may be bumpy due to renewed contagion waves, explains Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank:
The UN warned that the coronavirus crisis could shed four years of growth and push 130 million people into extreme poverty. If the business reopening plans fail worldwide, these numbers could shoot up and paint an uglier economic picture for the decade to come.
The latest weekly US jobless report will another dollop of paint to the canvas – economists predict that another 2.5m people filed new unemployment claims last week.
That would lift the total since the crisis began to around 35 million people. Unimaginable a few months ago.
The agenda
9am BST: European Central Bank publishes its Economic Bulletin
