COVID-19: The economic impact is becoming clearer

Following the long-awaited fiscal response from the US last week, the pace of news this week has been somewhat slower.

Alongside the daily releases on the progression of the disease, we are seeing more of the economic impact of the measures taken to slow the progress of the disease:

• Chinese Manufacturing PMIs exceeded the market estimate by some margin and gave some hope that, after containment measures are lifted, economic activity can return at pace.
• Following the 3.3 million increase in initial jobless claims last week, the US recorded a further 6.6 million claims this week. Further colour has been added by the Non-Farm Payrolls report, which showed a reduction in the US labour force of 701,000. It must however be remembered that the cut-off date for this report was 13 March, before the majority of containment measures were put into place across the US.
• Somewhat unsurprisingly, European PMIs showed a dramatic slowdown, with the services report weaker than that of manufacturing.

Oil was driven as much as 21% higher overnight as President Trump tweeted that the Saudi Arabian administration had agreed to cut supply by “approximately 10 Million Barrels”… “Could be as high as 15 Million Barrels” as well as a further announcement by OPEC of a virtual meeting on Monday. The price has since drifted back and we await news from OPEC early next week.

The equity market rally we witnessed into the end of the quarter proved fragile and may have been driven by fund manager positioning prior to quarter end. Trading volumes in markets this week have, however, been better than the past few weeks. Corporate fixed income mirrored equities for the earlier part of the week and has drifted back mildly as the week has progressed. Liquidity in corporate debt remains an issue.

It was tempting to see the moves in equities at the start of the week as the beginning of a recovery, however fragile. Nevertheless, we believe we will see many false dawns before a prolonged recovery in equity markets, and are not minded to chase each and every rally. In order for investors to gain the confidence required to drive markets higher and bring liquidity back to normal levels, we believe that evidence will be required of the slowing of the progression of COVID-19 as well as a clear pathway to a resumption of normal economic activity. Whilst our longer-term view remains optimistic, in the short term, we have looked to raise cash and reduce the economic sensitivity of certain holdings within our portfolios. We believe this action remains prudent given the heightened uncertainty that will persist for at least the next few months.