Markets expect more policy response to bridge shorter term disruptions

  • 24th September 2020

What has happened

With Europe at the epicentre of the new viral restrictions we have become accustomed to late rallies in the US rather than selloffs. Yesterday the incremental virus news caused US equities to capitulate with the headline index off over 2%.

Vaccine developments

Whilst the viral backdrop is clearly worsening in Europe there has been incremental positive news on vaccines. Johnson and Johnson have announced that their candidate was moving into Phase 3 trials. This particular vaccine is differentiated in that it only requires one dose rather than most others which require two, enabling quicker deployment across a population. There are also suggestions that London could host the first ‘human challenge trials’ for COVID where volunteers are deliberately infected to test experimental vaccines. These challenges are not without their ethical concerns particularly as the UK has previously classified COVID-19 as too high risk for such studies. With the UK bracing for a second wave, the arguments in favour of this approach are likely growing.

Europe tightens restrictions as talk of stimulus increases

France has divided its country into zones depending on the coronavirus alert level and is giving the local authorities the flexibility to determine tightening restrictions relative to the region’s status. Linked to this, Germany has issued travel warnings to parts of France, informed by these alert levels as the German foreign minister, Heiko Maas, entered quarantine after one of his protection team had the virus. In the UK, markets are expecting an announcement from the Chancellor, Rishi Sunak, today who is expected to unveil a support package for workers. The furlough scheme has been gradually phased out over the summer and is scheduled to finish by the end of October. According to the FT, there is an expectation that the new scheme will subsidise the wages of part-time workers and provide an extension to the current loan schemes. Fed Chair Powell yesterday warned that the economic recovery was at risk and stressed the need for fiscal stimulus given that the central bank had used almost all of the tools at its disposal. This exact statement could have easily come from the Bank of England or the ECB.

What does Brooks Macdonald think

With the path of travel shifting from loosening restrictions to tightening, markets are going to increasingly expect more policy response to bridge shorter term disruptions. Central banks globally have been stressing to their governments that fiscal policy will need to play an outsized part during the second wave. If economic data does worsen co-ordination between monetary and fiscal policy will be essential to maintain confidence.

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