One of the main factors weighing on markets is the continued pick up in European coronavirus cases
- 18th September 2020
What has happened
Equity markets faltered yesterday as a combination of weaker than expected data and increased coronavirus cases impacted sentiment. As we have seen in recent days, Technology has been experiencing outsized swings so with the US index and European index in negative territory, Tech underperformed.
One of the main factors weighing on markets was the continued pick up in European coronavirus cases. Whilst the numbers are undoubtedly amplified by increased testing capacity versus the first wave, France is now seeing over 10,000 daily new cases as is Spain. In the UK there are issues with testing capacity with the NHS Test and Trace program director saying that the number of people requesting tests is around 3 to 4 times more than the number available. This is likely to suppress the total number of daily cases even as the 7-day average moves to its highest level since May. The level of patients in intensive care remains lower than the initial March/April surge but there are signs in France that hospitalisations are picking up. Against this context the announcement that vaccine developer Moderna may not be able to examine their phase 3 data until December rattled sentiment further, particularly as it goes against the more positive timeline from US officials in recent weeks.
Bank of England meeting
Sterling fell after the Bank of England announcement despite the policy rate remaining unchanged. The driver of this was a discussion on how a negative interest rate ‘could be implemented effectively’. Short dated gilts have recently been trading in negative territory and the BoE minutes give further justification for these moves. The review which will take place between the central bank and the Prudential Regulation Authority would ‘begin structured engagement’ during Q4 which suggests that any action is unlikely to take place this calendar year but the mere discussion prompted sterling to fall. The Bank of England, by considering negative rates, is showing a desire for further accommodation which arguably increases the possibility of additional asset purchases as soon as the November meeting.
What does Brooks Macdonald think
The noise around Brexit has increased due to the government’s tabling of the Internal Market Bill and the EU response. At the same time the pick up in UK cases (possibly underreported due to testing capacity) makes the economic outlook uncertain. The Bank of England will be conscious of this and whilst no stimulus was announced yesterday we view the minutes as readying for action if either the Brexit or Coronavirus outlook worsens.
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