Market Commentary – August 2020
By Neil Worsley, Investment Strategist
The recent agreement by the European Union to push ahead with its €750bn Coronavirus Relief Fund was always likely to happen, but, as always, where the EU is required to agree something major, it is never straightforward.
The relief package was approved by all 27 nations after much bickering and a number of deadlines coming and going, as the more financially frugal nations led by the Dutch and Austrians were not so happy to give money to support the less well managed economies of the Italians and Spanish. In the end, the Germans, as is usually the case, managed to negotiate a path through the grandstanding and force through a compromised deal with all parties looking bleary eyed after the commonplace all night session with all parties declaring victory. While all this is par for the course where the European Union is concerned, what marks this decision out as ground-breaking is the nature of the agreement, in that the finance is to be raised by the collective EU and not by individual states, which sets a big precedent. Although this deal was somewhat forced upon them due to the present crisis, it does at least signify a move towards fiscal co-operation even though more coordinated fiscal union may have to wait until the next crisis.
However, this new package, combined with existing fiscal stimulus and European Central Bank aid, brings the total aid to over €2tn giving Europe welcome financial support to enable its economy to recuperate from this shock.
Staying with the European Union, the latest Brexit talks with the UK have, not unexpectedly, once again broken down. While little progress seems to have been made, with each side blaming the other and the final deadline fast approaching, it gives some hope that the ability of the EU to prevaricate on most things until they are forced to agree something could mean a deal of some sort (or perhaps lots of mini deals) is still a prospect. With Covid 19 ravaging all European economies it seems highly unlikely that anyone wants yet another economic hurdle put in the way and it has been highlighted with Spanish pleas for UK tourist restrictions to be lifted in some areas to assist their economy. A no deal scenario is in no-ones interest and while the blame game is likely to go on a while yet it is still possible that the rabbit will once again be pulled from the hat just in time in what must be the longest conjuring trick ever.
For as long as I can remember, the US has always taken the lead in navigating the world out of a crisis, often with ground-breaking decisions taken at lightning speed. This time it feels different. There seems little political consensus in the US on how to control the spread of Covid 19 with cases continuing to climb to new highs and uncertainty over the financial aid required. While the Federal Reserve continues to be the cornerstone of assisting the economy the politicians dithering can only deepen the crisis.
The economic data reflecting the true cost of the epidemic is now starting to be released and while the numbers are horrifying and headline grabbing they are mostly no worse than expectations: Of course financial markets are looking out 6 to 12 months and while it is near impossible to gauge financial metrics over this time frame markets and politicians are holding their collective breath in the hope that Covid 19 abates before the gargantuan amount of financial assistance already put in place runs out. The race is on.
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