If Friday’s shocker of a US non-farm payrolls report told us anything, it was that there is a serious disconnect between what Wall Street and financial markets are telling us, and what is happening on Main Street and the truly dire economic data not only in the US, but from across the world more broadly.
Asia markets have picked up where US markets finished on Friday with a similarly positive session which has been carried over into a positive start for markets in Europe this morning, with the main focus for investors being on the slow resumption of economic activity.
It is becoming increasingly apparent that financial markets appear to be taking their cues from expectations of a big economic hit this year, being quickly followed by a similarly decisive rebound in 2021, with anticipation of lockdowns being eased, helping add fuel to the fire of optimism.
While this might be entirely understandable under normal circumstances, the current situation is anything but. This suggests that the rise we are seeing in stock markets seems somewhat optimistic and to some extent a little unrealistic.
For now, markets appear to be pricing in the prospect that economic activity can improve from here on in, and while that may well be true, it’s unlikely to be anywhere near the same level we saw before the crisis started, notwithstanding the fact we have no clear idea of the economic damage that has been done already. We only need to look at the economic data coming out of China since their lockdown was lifted in March to know that any rebound is likely to be slow, and uneven.
It seems fairly obvious that social distancing is likely to be with us for quite some time which means people will be travelling a lot less, as well as going out a lot less.
This is something airlines are already starting to realise with recent announcements of wide spread job losses, and further sharp rises in unemployment when furlough schemes eventually taper off, for hospitality, retail and the hotel sector, and is likely to mean significantly lower levels of consumer spending. We’ve already seen evidence of that with the latest numbers from Springboard showing an 80% drop in footfall on the UK high street in April, almost double from what we saw in March. On the positive side there have been signs of a pickup in the last couple of weeks, as large DIY centres reopen along with the prospect of garden centres later this week.
The one main takeaway from company announcements in the last few weeks has been the preservation of cash, the cancellation of dividends, and the drawing down of credit lines as businesses hunker down in order that they can ride out the next few months of ongoing economic turmoil.
The pound has seen little in the way of a reaction to Prime Minister Boris Johnson’s announcement last night that some measures of the lockdown might be relaxed in the coming days. We should get more detail on this later today when the Prime Minister addresses parliament, as well as releasing the full text of the various amendments.
Attention this week is also likely to be on the start of trade talks between the UK and EU, which are due to get under way tomorrow.
Last week in what was seen as a controversial ruling the German constitutional court stated that there were some elements of the European Central Bank’s asset purchase programme that required clarification over their legality. In response, the EU Commission, rather than seeking to address the German courts concerns over the legality of the ECB’s actions in relation to German constitutional law, said they would be taking legal action against the German government, over the court’s decision, saying only the EU has authority over the ECB. This may well be true however the EU Commission doesn’t have authority over the Bundesbank, the German courts and German government do. If the Bundesbank is forced to step away from bond buying on the ECB’s behalf, then the EU really would be in trouble. Furthermore, this seems a rather tone-deaf approach and optically is unlikely to play out well if the EU gives the impression it doesn’t care too much for member countries constitutional frameworks.
This disagreement is unlikely to be euro positive, and will make it much more difficult for the EU to put together any sort of coherent or comprehensive fiscal response to what is likely to be a southern European depression.
US markets look set to follow their gains from Friday with another positive open later today.
Tesla shares closed at their highest levels since February at the end of last week, ahead of what was expected to be the reopening of its Fremont California factory this week. This has now been delayed after Alameda county insisted on a delay. This prompted CEO Elon Musk to tweet that he would take his factory out of California, at the same time as taking court action to overturn the ban.
Apple also announced late on Friday it would be reopening some of its stores in the US starting this week.
It’s also been a tough quarter for the hotel sector with Marriott International becoming the latest to outline the damage done to its business in the last few weeks, with its latest Q1 update. In February, Marriott reported profits of $0.85c a share on revenues of $279m which was a significant decrease on its numbers the previous year. Since its $13bn acquisition of Starwood in 2016 the hotel chain had seen its share price soar, helped by $16bn of buybacks to shareholders which saw the shares hit new record highs at the end of 2019. Since then the sector has imploded with lots of speculation about whether the hotel chain or its brands can survive on debts of $10.8bn and very little income in the short term.
With hotel occupancy rates expected to fall to as low as 20% in April and May, and most of its employees furloughed, senior management are scrambling around to get funding to roll over their debts. In April Marriott raised $1.6bn for 5 years at a rather hefty yield of 5.75%, as it looks to buy itself time to ride out the current turbulence, while last week management secured another $920m from American Express and Chase through amendments to credit card agreements, with the two providers.