LGT Market Update

Wednesday 11 March, 2020

Firstly, The Bank of England cut base rates by 50bp to 0.25%. They also made a technical adjustment to the counter cyclical buffer that could unlock as much as £190 billion of bank lending. In addition, a new term funding scheme for small and medium size enterprises (TFSME) was unveiled that may unlock another £100billion of lending to businesses that are likely to be the most affected by the disruption of COVID-19. 

Secondly, Rishi Sunak, in his first Budget as Chancellor, announced a fiscal stimulus of £30 billion pounds in "temporary, timely and targeted" aid. He said that we had to be ready for up to 20% of the workforce to be off at the same time. He has taken action to help people who are off sick or self-isolating with sick pay. He has temporarily removed business rates for many small businesses. He is taking measures to ensure that these businesses survive any slowdown that the Coronavirus may cause and prevent it spreading. He said they would do whatever it takes to keep the economy strong and the NHS would have whatever it takes to cope with the Coronavirus. They and the Bank of England stand ready to take further action.

From an investment market point of view, this has had little impact.  We need to see similar action from the US authorities. The Federal Reserve cut rates 0.50% last week and a further rate cut is expected. On Tuesday, the US equity index market gyrated in a 5% range as rumours came and went about proposals for tax cuts and other measures from President Trump. The S&P 500 ended nearly 5% up but down on the 11^th March. There is a meeting at the White House to discuss the situation and we hope to see some action out of that. So far Trump's attempt to get a permanent payroll tax cut has been rejected and the Democrats are looking for a more targeted approach. With Congress planning to be in recess next week, getting a Temporary, Timely and Targeted package, as Rishi Sunak put it, may be much harder in the US

Elsewhere the Australian Government is expected to announce a fiscal stimulus package on Thursday. The European Central Bank is also scheduled to meet then, and we should expect them to be adding further stimulus to the European economy. ECB President, Christine Lagarde, has indicated that they are ready to act but called on European leaders to take co-ordinated action. 

The G-7 Finance ministers and central bankers met last week and when the Fed cut there was some disappointment that there was not further co-ordinated action. This week we are seeing action from many governments and Central banks. They may not all be co-ordinated but are working towards the same goal of ensuring that when we come out of this present crisis, the economy will be well placed to recover.  As ever, action from the United States will be key to the global economic outlook. 

When we come out of this, we expect central banks will be slow to take back the rate cuts.  As growth recovers, equity markets will look cheap relative to bonds. At present many investors are focussing on the short-term fears rather than the longer-term opportunities in the equity market. In the short term we may continue to see big swings in both directions but would encourage investors to look through these short-term moves.

For more information about how to react in times of volatility read: Our Investment Policy Committee reviews what to do in times of market volatility

 

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