Market news 13 July 2020

UK Chancellor's summer statement announced new measures to avoid long-term damage to the economy...

• UK Chancellor Rishi Sunak delivered a mini-budget on Thursday, announcing among other things SDLT relief for home-buyers and VAT reductions for consumers. In order to cushion the inevitable round of redundancies to come once the furlough scheme ends in October, the Chancellor committed to pay firms £1,000 bonus for every staff member kept on until the end of the year. VAT on food, accommodation and attractions will be slashed from 20% to 5%, effective from 15^th July, and there are further incentives of up to 50% off food bills for consumers eating out Monday – Wednesday in August
• Sunak also announced stamp duty relief on purchases of properties valued up to £500,000, at least until 31 March 2021. Grants will also be offered for energy-saving home improvements, of up to £5,000 or £10,000 depending on means-testing. This is expected to remove some “friction” costs and remove some of the stifled demand in the UK property market, however the changes in job protection are likely to be more impactful
• New policies are expected to come at a cost of c.£30bn to the UK taxpayer (1.5% UK GDP), which will be in addition to the previously announced policy measures that provided tax deferrals and loan support amounting to c.£123bn. The benefits are yet to be seen in incoming economic data, with the UK on track to contract c.10% this year, but the effects will be clearer in Q3

Business conditions beat expectations, although recovery is likely to be slow

• The US ISM survey rose to 57.1 in June as companies reported better conditions this month than the previous month (May: 45.4). The business activity and new orders rebounded over the month, from 41.0 to 66.0 and 41.9 to 61.6 respectively, likely reflecting pent-up demand from States previously still in lockdown. However, the employment index remained weak at 43.1 (May: 31.8). Only 16.1% of respondents reported increased employment, as companies remain hesitant to re-hire full workforces until the pickup in activity is sustained
• French industrial production rebounded by +19.6% in May, ahead of expectations of a +15.4% increase. This recovered some of the lost output from the sharp declines in March (-17.0%) and April (-20.6%), leaving industrial production down -21.2% from February levels. German IP rebounded 7.8% mom, although this follows a 17.5% decline in April. Italian IP staged a recovery of similar magnitude

Tetchy week for risky assets on COVID and geopolitics

• Global equities were for the most part weaker as the rate of new Covid infections accelerated across large swaths of the US, particularly in the South and Far West. Adding to the jitters was the increasingly hawkish rhetoric exchanged by the US and China, with Democratic candidate Joe Biden striking a similarly uncompromising stance to that of the Administration. This then looks likely to be a feature of the landscape right up to November’s General Election
• Notable exceptions to the softness in equities were China A-shares, which boomed apparently on strong retail buying but also most likely with official sector support, and US large cap tech, which seems currently to be viewed as a relative safe haven compared with other more cyclical sectors (Value, Small Cap and Emerging Markets ex China were all laggards over the week)
• A more risk-on tone prevailed in FX, where the USD lost ground against “risky” G10 currencies such as the Scandis, sterling and NZ dollar, although it was notable that havens such as yen and gold also gained ground. 10-year US treasury yields touched their lowest levels since late April below 0.60%. The inference would be that the exit from lockdown is regarded as more liable to a sudden reversal in the US than it is in other advanced economies