11 May - update from our investment partner

  • 11th May 2020

What has happened

Last Friday’s US employment report was the worst since the Great Depression but that did not stop the market’s rally last week. The US equity market was up over 3% and the technology sector outperformed even that with the effect that technology has now posted positive returns year to date. The details of the US report contained little good news but largely echoed the weekly jobless claims which markets have been paying closer attention to. The month of April saw the US workforce contract by 20.5m people and the unemployment rate tick up to 14.7%. Despite these fairly dire numbers, the market looked through the near-term impacts yet again to the sunnier pastures of an exit from lockdown.

Brexit risk to rear its head

A theme of the last few weeks has been the risks of 2019 returning with a coronavirus skew. US/China trade was the most recent example but really any situation which looked to be developing cracks can be seen as a chasm with a COVID-19 economic lens. The third round of EU/UK negotiations start this week over video conference and the market’s expectations are for little real progress. Politically charged and complex negotiations are often brokered in informal side-line conversations where economic truths can be discussed with less fear of one’s comments leading to political exile. The more staged negotiations also take place as the clock ticks towards the 1st July deadline for both sides to decide whether to extend the transition period beyond the 31st December. So far the UK government has shown little appetite for this but the impact of coronavirus on the government’s focus, lack of face-to-face negotiations and the fragility of the economy all create a viable excuse should the UK want to opt for it. Sterling has rallied off its lows against the Euro sitting at 1.14 today compared to 1.06 in the depths of March however it is unlikely to appreciate being put back into the spotlight if trade talks flounder.

What does Brooks Macdonald think

Brexit may well bubble away in the background for a few months yet but if the market begins to suspect that the UK is comfortable exiting the EU without a deal at the end of the year sentiment is likely to turn rapidly. Clearly it remains to be seen if Brexit will steal the headlines from US/China tensions in the coming weeks, but with the UK still in lockdown risk appetite would be tested.

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