The rapidly-moving coronavirus pandemic continues to roil financial markets across the globe, and will have far-reaching implications for business and wider society. In order to help businesses through the uncertainty of this pandemic, Caxton has created a range of resources to help you navigate through this crisis as it unfolds.
May 2020 could go down as the month that changed the course of the euro, and ensured the currency’s longer-term stability, with EU leaders inching closer to agreeing a deeper fiscal union as part of the coronavirus recovery package.
Since inception, the euro has been a political currency without a fiscal union underpinning it - hence the reliance on the ECB to constantly backstop things. Now, however, we are moving closer towards a much greater degree of fiscal integration among EU member states, with plans for common debt issuance to make up a significant proportion of the €750bln “Next Generation EU” fund.
In true EU fashion, however, the plan is a little bit of a fudge, aimed to please both the ‘frugal’ northern member states, and the more fiscally expansive southern nations. As a result, the plan includes €500bln in grants – to please the south – and €250bln in loans – to please the north. One must hope that the plan is approved by each and every national government, which could prove to be a major stumbling block.
The plan is important as, if implemented, it would provide investors with reassurance about the future of the bloc. It is as much about symbolism as it is about the recovery package in itself.
While the funds will likely arrive too late, and be too little, to significantly alter the course of the economic recovery, implementing the plan would be a major step towards securing the longer-term future of the bloc. This is due to the plan removing a significant degree of doubt in investors’ minds about the sustainability of the bloc, and the fact that the ECB will no longer be the ‘only game in town’ when it comes to being the glue holding everything together.
Furthermore, the recovery package should allay significant concerns over how nations with higher debt burdens – such as Italy – will finance the relief and stimulus packages needed to bring their economies out of the coronavirus recession. Raising debt at an EU-wide level would immediately remove any worries about nations being able to finance spending, and should bode for a quicker and more resilient economic recovery as social distancing measures are lifted.
The market reaction to the recovery package was largely as expected, a stronger euro, a fall in periphery bond yields, and a narrowing in core-periphery yield spreads. All textbook signs of a market that has become more confident about the eurozone holding together.
While I am not prepared to go as far as ECB President Lagarde and state that “there will be now new euro debt crisis” after the pandemic, it is clear that the recovery package – if and when it is approved – will be a major step towards greater harmonisation of the eurozone.
The bloc faces significant challenges this year, with GDP set to fall by as much as 12%, but this is an important step towards facing up to that challenge.
Michael Brown, Senior Market Analyst, Caxton FX
It goes without saying that the coronavirus pandemic is having a brutal, frankly harrowing, impact on labour markets across developed markets. Having been close to full employment at the beginning of the year, we are now in the midst of mass unemployment; a phenomenon which will likely have a disproportionate impact on those at the lower end of the income spectrum.
The policies implemented to mange this tsunami of job losses have been vastly different depending on which side of the Atlantic you sit. In the US, policymakers have largely chosen to strengthen the social security safety net; raising unemployment benefits and increasing the number of persons eligible to claim unemployment insurance.
In contrast, European policymakers have largely attempted to keep people in employment where possible, introducing a host of furlough and short-time work schemes to support businesses and preserve jobs to the greatest possible degree.
The immediate impact of the measures has been largely as expected; sky-high unemployment claims in the US (36 million since the pandemic began), and sky-high furlough claims on this side of the pond.
However, as the pandemic continues, and the economic fallout from the virus becomes clearer, questions are beginning to be asked over whether the job retention schemes are merely prolonging the inevitable. Already, the UK’s Coronavirus Job Retention Scheme (CJRS) has seen more than 8 million jobs furloughed, at a cost to the taxpayer of more than £11bln thus far. With the scheme having now been extended until the end of October, it is conceivable for the final cost to run to in excess of £50bln.
While only time will tell whether this is money well spent, it is already clear that some jobs have been lost forever, or at least for a prolonged period of time. The travel and leisure industry, for example, has been decimated by the pandemic. By some estimates, it could take until 2023 for air travel demand to return to pre-virus levels; it is not sustainable for companies not to trim their workforce in such an environment.
As a result, it is likely that the furlough scheme is keeping alive some ‘zombie’ jobs, and merely serving to postpone the inevitable layoffs.
This raises important questions over what comes next, and some clarity on this should come in July the point at which employers will begin to contribute towards the costs of the furlough scheme. It is at this point that employers’ willingness to bring people back onto their books will be put to the test. Should employers not wish to re-hire, the furlough scheme will merely prove to be a very expensive way of delaying unemployment.
However, on a more optimistic note, the furlough scheme – if phased out correctly and if the economy recovers swiftly – may prove to be just the tonic that the labour market requires to get back to a more solid footing.
Only time will tell.
Simply email [email protected] to arrange a time to speak or alternatively ask any questions you may have. We look forward to hearing from you.
Michael Brown, Senior Market Analyst, Caxton FX
Having spent most of the last two months in hibernation, the global economy appears to be finally – albeit gradually – turning a corner. Of course, the last thing anyone needs now are further economic roadblocks to appear, but this may be exactly what’s about to happen.
As lockdown measures begin to be eased, the risk of a resurgence of the coronavirus increases accordingly. Such a second spike in infections would likely cause much more harm to the economy than the first, with many businesses that weathered the storm of the initial shock unable to do so for a second time.
In order to prevent such a second wave, governments are – on the whole – taking a gradual approach to lifting the social distancing measures. While effective at preventing a resurgence in the virus, the slow pace of re-opening will prolong the economic hardship, and will make a ‘V’ shaped recovery almost impossible. Consensus seems to now be coming round to this view, with a ‘Nike swoosh’ the favoured trajectory at present, but a more pronounced ‘U’ shaped recovery remaining a high probability.
Furthermore, one must recognise that the longer economic activity remains depressed, the greater the chances that present liquidity issues – which have been addressed by fiscal support – become more catastrophic solvency issues. It is at this point when the recession could become a depression.
As if that wasn’t enough to worry about, one must also be aware of the likelihood that geopolitical tensions begin to increase. Said tensions are most likely to stem from another flare up in US-China relations, with President Trump seemingly intent on seeking some form of reparations ahead of his re-election bid in November.
Frankly, the last thing the global economy needs at the moment is a return to the trials and tribulations, and the tit-for-tat tariff escalations, that a second round in the US-China trade war would result in. Such an escalation in trade tensions would pose a significant risk to the economic recovery, threatening to plunge the global economy back into a deeper downturn before the rebound had found its feet.
Both of these two risks have finally started to be priced into markets over the past week, with risk appetite taking a hit, and equities beginning to pullback after a relentless grind higher since the March lows. Such a trend is likely to continue, with the precarious state of the economy leading to an environment where it is impossible to buy riskier assets with any significant degree of conviction.
As a result, and as the aforementioned risks begin to play out, safe-havens should begin to appear more attractive, therefore Treasuries and the US dollar should remain well-bid. As for equities, broader indices should start to rollover, however those companies which may be somewhat immune from, or even benefit from, the current situation should outperform.
Simply email [email protected] to arrange a time to speak or alternatively ask any questions you may have. We look forward to hearing from you.
Michael Brown, Senior Market Analyst, Caxton FX
It is undoubtedly a positive sign to see economies beginning to emerge from their enforced hibernations as coronavirus lockdown measures begin to be lifted; but by no means is the economic damage over. Instead, one could say that this is just the ‘end of the beginning’ when it comes to the coronavirus pandemic.
Over the last week, Italy has outlined a plan to gradually lift restrictions from 4th May; Spain will soon be allowing people out for exercise; France plan to re-open slowly from 11th May; while President Trump has outlined his plan for reopening the US.
These are, of course, positive signs, and the first indications that we have seen of things returning to some form of normality. However, this is by no means a return to the ‘old’ normal, nor will it be a swift return to pre-crisis levels of economic output.
There are three, relatively simple, reasons why the economy will not immediately bounce back to where we were in Q4 2019.
Firstly, social distancing is here to stay. While the rather draconian ‘lockdown’ measures are being lifted, all medical expertise points to some form of distancing remaining in place until either a treatment or a vaccine for COVID-19 has been found. Therefore, we will all have to get used to standing 6 feet away from each other in public, and many venues – such as restaurants and cafés – will be forced to operate some way short of their capacity. By default, a restaurant operating at only 50% of capacity will find it near impossible to generate 100% of the revenue that was seen previously. Therefore, until social distancing is no longer required, the entire economy will be operating some way short of potential.
Secondly, there is likely to be a general reluctance among members of the public to re-engage in economic activity, even after the lockdown is lifted. Fear is, of course, a very powerful emotion, and the fear of catching a potentially deadly virus will likely put people off going to the cinema, particularly when the can watch Netflix from the comfort and safety of their own home. Already, polling from YouGov[1] points to less than half of the population being comfortable to visit restaurants and gyms; while Gallup[2] polling notes that only around 20% of the US population will immediately return to ‘normal activities’. Until people are prepared to return to pre-crisis activities, growth will not be able to significantly and substantially rebound.
Lastly, and most importantly, is the risk of a 2nd infection wave once the lockdown measures are lifted. Already, just a week or so after lifting containment measures, Germany may have to re-tighten restrictions after the ‘R’ value of the virus rose back above 1. Should such steps need to be taken in other major economies, the impact would be catastrophic.
Despite these three significant risks to the growth outlook, markets remain somewhat over exuberant. As a result, and as these risks begin to crystallise, safe-havens are likely to once again find significant demand, and a re-test of the March lows remains likely for global equity markets.
With foreign currency being a fundamental part of business, Caxton are providing a free consultation service to all UK businesses, available Monday to Friday 8am-6pm.
Simply email [email protected] to arrange a time to speak or alternatively ask any questions you may have. We look forward to hearing from you.
Michael Brown, Senior Market Analyst, Caxton FX
As the coronavirus pandemic shows signs of having reached its peak, at least for this infection wave, attention is beginning to turn to what comes next for the global economy; which is undoubtedly now in its first recession in over a decade, and likely in the deepest contraction since the ‘30s.
One question that many are likely pondering is whether the post-virus economy brings with it an inflationary wave. In the immediate-term, as the world continues to grapple with getting the epidemic under control, disinflation is blatantly on the horizon. In the longer-term, however, an inflation wave is likely to surface, possibly before the year is out.
Firstly, let’s look at the current environment. At a very basic level, a recession is naturally a disinflationary environment; the drop, or collapse in this case, in demand caused by an economic downturn instinctively depresses prices. Furthermore, the recent collapse in crude prices – including US oil falling into negative territory for the first time ever – sparked by a combination of the Saudi-Russia price war, and evaporating global demand, will naturally have a downward impact on CPI.
It is, at this point, key to understand that without demand, you cannot have inflation. Until the coronavirus lockdown measures are lifted, there will not be a substantial pickup in demand.
However, looking further ahead, the eventual pick-up in demand, combined with the present expansionary monetary policy environment, should see an inflationary wave return in the medium-term; especially given policymakers’ tendencies to allow economies to run ‘hot’.
While some demand has undoubtedly been lost forever, nobody will be going for 3 haircuts on the same day to make up for those missed for example, there will be a near certain bounce in demand; especially as those who have been cooped up inside for weeks on end flock to businesses in the services sector at the first taste of freedom. Even those who have, sadly, found themselves unemployed as a result of the coronavirus crisis will likely contribute to this demand surge due to the stronger social safety nets implemented by governments worldwide.
Furthermore, it will be difficult for OPEC+ oil producers – particularly Saudi Arabia and Russia – to sustain themselves with oil close to $20bbl. As such, further production cuts remain a distinct possibility which, along with an eventual pick-up in demand, should help prices to recover at least some of the losses.
For markets, an eventual return of inflation may dampen the attraction of bonds in the longer-term, with expansive asset purchase programmes from almost all G10 central banks set to keep yields relatively depressed. Meanwhile, a solid hedge against inflation has always been gold; while equity market returns will likely outpace that of bonds in the longer-term. In the FX world, an pick-up in inflation may have a rather muted impact, given the pick-up is likely to be relatively symmetrical across developed markets.
With foreign currency being a fundamental part of business, Caxton are providing a free consultation service to all UK businesses, available Monday to Friday 8am-6pm.
Simply email [email protected] to arrange a time to speak or alternatively ask any questions you may have. We look forward to hearing from you.
Michael Brown, Senior Market Analyst, Caxton FX
Wall Street, and markets more broadly, seem to think that everything is going to be ok, and that the worst is now firmly behind us.
On Main Street, in the real economy, things are different; labour markets are being destroyed at an unprecedented pace, lockdown measures are crippling the economy, and GDP is set to fall by the most in almost a century.
This growing divide comes as a result of two factors, however one gets the feeling that the imbalance must surely be addressed at some point.
Firstly, it is important to remember that markets – particularly equities – are a discounting mechanism. As a result, with the coronavirus pandemic’s infection rate beginning to slow, and talk of economies re-opening grows, investors are pricing out the possibility of a prolonged virus-linked shutdown.
Secondly, and a running theme of at least the last decade, is that investors remain hooked on cheap liquidity and easy money. The Federal Reserve’s ‘kitchen sink’ approach to policymaking, which is attempting to channel credit to as many people as possible, has the inadvertent side effect of inflating asset prices. The Fed’s approach, which the economy undoubtedly warrants, also means that investors retain confidence in the so-called Fed put; the notion that the central bank will always ride to the rescue when things get tough.
Despite investors’ optimism, things could not be more different in the ‘real’ economy.
As a result of the lockdowns introduced to control the pandemic, we are witnessing an unprecedented scale of labour market destruction. In the US, more than 16mln people have lost their jobs in the last three weeks alone. In other words, almost a decade’s worth of jobs gains has been wiped out in little under a month.
Meanwhile, the growth outlook looks similarly dire. With entire economies having been shut down, the IMF are expecting the global economy to experience its steepest contraction in almost a century this year; while hopes of a swift ‘V’ shaped recovery have all but faded, and a more prolonged ‘U’ shaped scenario is now the base case.
It should be clear, to even the humblest student of economics, that this divergence between exuberant investors and a rapidly crumbling real economy, is unsustainable.
As a result, in the medium-term, it is logical to expect sentiment to once again deteriorate; either as a result of a slower re-opening of the economy; a potential second wave of infections; or as a result of the impact of the Fed’s stimulus waning.
Therefore, one can expect equities to fall back and retest the lows seen in mid-March; while haven assets – gold, Treasuries, and the dollar – should remain well-supported.
Despite what the market wants to believe, the coronavirus pandemic is far from over. In fact, the economic implications of it are only just beginning.
With foreign currency being a fundamental part of business, Caxton are providing a free consultation service to all UK businesses, available Monday to Friday 8am-6pm.
Simply email [email protected] to arrange a time to speak or alternatively ask any questions you may have. We look forward to hearing from you.
Michael Brown, Senior Market Analyst, Caxton FX
There hasn’t been much good news lately, as the coronavirus continues to rampage across the world. Investors, however, are beginning to see some glimpses of light emerging at the end of the tunnel.
The infection rate in Italy, one of the hardest hit nations thus far, continues to decline; New York, the hardest hit US state, may have reached the ‘apex’ of its infection curve; while Wuhan, the Chinese city where the pandemic began, has now reopened after a near 3-month long lockdown.
This is, however, a guessing game; both for epidemiologists and for investors.
The peak of the disease can, by definition, can only be identified after the event. Therefore, while these are – undoubtedly – positive signs, it is difficult to say with certainty that the world is out of the woods.
This poses a problem for investors, who are trying to position for what comes next, despite the present state of the pandemic remaining shrouded in uncertainty. Furthermore, and a second problem facing markets, the economic impact of the pandemic and associated lockdown measures is also unclear.
What is clear is that we are now in the midst of the first global recession in a decade. What is less clear is how quickly economies can bounce back from their presently hibernated state.
There is, unfortunately, not a clear answer to this question at this stage; though it is clear that the recovery will likely be asymmetric. In countries that have aggressively eased monetary policy and implemented significant, targeted, fiscal measures – such as the US and UK – the recovery should be swifter, albeit not immediate. In areas, such as the eurozone, where the monetary response has been more limited, and the fiscal response somewhat lacking, the recovery is likely to be more prolonged.
As investors digest incoming economic data, and attempt to piece together the post-pandemic economic jigsaw, the only certainty is that volatility is set to remain elevated. This elevated volatility should also see safe-haven assets – bonds, the dollar, and gold – remain supported, as a result of both risk aversion and investors hedging riskier positions.
History may be able to teach us some lessons about where we go next. In 2008, the most recent global recession, equity markets didn’t bottom out until around 6 months after the bear market began. Despite the accelerated nature of the sell-off this time around, it is difficult to argue against there being further downside to come for global equity markets, particularly as the brutal economic blow from the pandemic becomes increasingly clear. It is also worth remembering that some of the biggest market rallies can be seen in bear markets.
To conclude, while there are clearly some glimmers of optimism beginning to creep in, it is far too early at this stage to say that the end to the pandemic is in sight. Consequently, volatility is set to remain elevated, and there may be more pain to come for risk assets.
With foreign currency being a fundamental part of business, Caxton are providing a free consultation service to all members, available Monday to Friday 8am-6pm.
Simply email [email protected] to arrange a time to speak or alternatively ask any questions you may have. We look forward to hearing from you.
Michael Brown, Senior Market Analyst, Caxton FX
I’m sure all readers will agree that the first quarter was a bumpy ride – for markets and for society as a whole – as the coronavirus pandemic gripped the globe and upended life as we knew it.
For financial markets, the first three months of 2020 were a journey from euphoria to panic. Having begun the year on an optimistic note, the mood swiftly turned to pessimism once we reached the halfway mark and the full scale of the global health crisis became evident.
The violent nature of the moves in March was unprecedented, and saw several milestones fall. Global equity markets saw $15tln wiped off their value in the worst quarter since 2008; the 10-year Treasury yield fell by the most since 2011; Brent crude experienced its worst quarter ever; and the dollar experienced its biggest 3-month rally in four years.
While the magnitude of the moves seen in Q1 was vast, we are by no means at the end of the story.
The fast-moving coronavirus pandemic, which is almost the sole factor driving price action, is far from over. Despite some small glimmers of hope that the epidemic curves may be flattening in some parts of Europe, the US outbreak appears to only just be getting underway. That is before we come to the economic implications of the ‘lockdown’ measures imposed to control the virus, which will become clearer in the months ahead.
At the beginning of the coronavirus outbreak – when the virus seemed isolated to China – the assumption was that the global economy would experience something of a ‘V’ shaped 2020. That being a scenario where output falls very sharply, before recovering equally as quickly once the virus blew over.
Now, however, it is clear that the pandemic is having a much more severe impact on the global economy, making a ‘U’ shaped scenario the best we can hope for. The first global recession since 2009 is now an inevitability, as economies across the world slowly shut down as the virus spreads westwards. The best hope now is that the economy can come out of its hibernation – with the help of accommodative monetary and expansionary fiscal policies – and return to a similar level of output in the second half of the year.
A more dire outcome – which may come about either as a result of the virus not being controlled, or due to the impotence of fiscal and monetary policies being exposed – would be an ‘L’ shaped scenario. This would involve a sharp slowdown in output – driven by governments effectively switching off entire economies overnight – before a failure to recover to the levels of growth seen before the pandemic struck.
Of course, with so many unknowns on the horizon, the only certainty is volatility; as market participants continually adjust their outlook for the global economy and position appropriately. The likelihood is that sentiment will sour once again, with further negative virus news likely. Furthermore, as the economic impact of the pandemic becomes clearer, risk appetite will also likely deteriorate.
With foreign currency being a fundamental part of business, Caxton are providing a free consultation service to UK businesses, available Monday to Friday 8am-6pm.
Simply email [email protected] to arrange a time to speak or alternatively ask any questions you may have. We look forward to hearing from you.
Michael Brown, Senior Market Analyst, Caxton FX
Our offices will remain open during regular office hours but we will also be starting our business continuity planning phase where we can work remotely, following Public Health England advice.
Our customer support team will be on hand and ready to help with any questions or queries you may have. We’re keeping our teams up to date with new information about the COVID-19 outbreak to ensure that we are prepared and adaptable to any changes.
We want to help all businesses in the healthcare sector. With immediate effect, we’re removing all transaction fees on international payments*.
Additionally, we are guaranteeing to fast-track new account applications for healthcare providers and importers of medicines or medical supplies.
This means that they will be able to:
*Fee of £10 for payments under £1,000 removed immediately and applicable until the end of April
