It’s a Lovely Day Tomorrow

Boris Johnson who has himself tested positive for Covid-19 has tried to invoke a war time spirit in Britain’s fight against the virus, so will Dame Vera Lynn’s ‘It’s a lovely day tomorrow’ go viral?

Given the lockdown perhaps we should all be singing ‘Ghost Town’ by The Specials. Failing that what about John Denver’s ‘Leaving on a jet plane’? Perhaps not as EasyJet, which has this morning grounded its entire fleet.

In terms of trying to work out what is happening from an investment perspective, I have turned to those wise words from former US Secretary of Defence Donald Rumsfeld

‘as we know there are known knowns, there are things we know we know. We also know there are known unknowns, that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know…and if we look throughout history…it is the latter category that tend to be the difficult ones.’

Many companies are having to currently suspend forward looking earnings guidance, as clearly there are too many ‘unknowns’ due to Covid-19.

All we can do is look at those countries that were the first to experience Covid-19 outbreaks to get some idea of impact on health services, scale, containment measures and economic pain.

Latest data from China would suggest that we can win the war against Covid-19 although the challenge of non-domestic flare -ups from overseas now appears to be the issue.

However, the global economy has tested positive for Covid-19 and is on a ventilator with central banks and governments pumping in a combination of oxygen and steroids to speed recovery. The patient is expected to be sick for three months, but will survive. How long a stay in hospital is required and how quickly it is back up on its feet is still an unknown. Some expect the patient to bounce back quickly while others think the convalescence period will be long. Perhaps we should focus first on getting the patient off life support and out of critical care? Then we can begin to assess how long it takes to return to full health.

Our government has already suggested that social distancing measures could extend up to 6-months and there is a growing realisation that this isn’t a 3-week phenomenon and our lifestyles will be disrupted for longer.

What have we been watching?

Many more deserted city streets. Even the International Olympics Committee has bowed to the inevitable and postponed the Tokyo Olympic Games until 2021. Tough times for investors also with more companies suspending dividend payments to help get them through the next three months due to a sudden and unexpected collapse in sales.

Markets started last week nervously as a $2trillion Senate proposal to support the US economy initially crashed to defeat after failing to secure the support of the Democrats who felt if favoured bigger companies. However, the subsequent market-sell off appeared to bring US politicians to their senses and a deal was agreed and voted thorough. The $2trillion deal includes direct cheques to many American households, an expanded unemployment insurance programme, loans to businesses and additional resources for healthcare providers.

In the US, the Federal Reserve (Fed) stepped into the breach announcing ‘whatever it takes’ with a barrage of new programmes to help keep financial markets functioning. This includes an open-ended commitment to keep buying assets under its QE programme. The Fed will be moving for the first time into the corporate bond market purchasing investment grade bonds. The Fed also made some reassuring comments about the US economy and said that it ‘is not going to run out of ammunition’. While this will keep markets functioning, we now need US politicians to get their act together. As we have seen in the UK, the scale of the Covid-19 challenge is such that it requires co-ordinated action from the central bank and government. US Secretary of the Treasury Steve Mnuchin said he expects the US Covid-19 lockdown to last 10-12 weeks. He announced initiatives providing $300bn of new financing, but still needs to act to support businesses and individuals. The US administration said it could also consider taking equity stakes in businesses to support them. Meanwhile, the number of Americans filing for unemployment has surged to a record high of 3.3million as parts of the economy go into lockdown.

The number of Covid-19 cases continued to grow in Europe while the WHO has forecast that the US could become the next epicentre. The death toll in Spain has now surpassed that in China. The number of cases in the USA also exceeds that in China. However, there was a glimmer of hope in China with the authorities saying that the lockdown in Wuhan, where the global outbreak began, will be lifted on 8 April. According to The Lancet the first official Covid-19 case in Wuhan was established early in December 2019. Wuhan was placed in quarantine on 23^rd January. Presumably this is why Boris Johnson has indicated between 10-12 weeks to get on top of Covid-19.

In the UK, the ‘flash’ composite PMI activity indicator had been nervously awaited as the first major indicator of how the economy was faring in the face of Covid-19 disruption. It dropped sharply, well below market estimates and was the fastest downturn in private sector business activity since data was first collected in 1998. The picture for the service sector was particularly bleak. With the government rapidly rolling out supportive measures we wait to see whether these steps are successful in limiting the fallout, such as to the jobs market, over the coming weeks. With the UK government ‘throwing money’ at the economy to support businesses and households it comes as no surprise that credit agency Fitch has downgraded UK government debt to ‘negative’ due to a significant weakening in finances.

In Europe, Covid-19 disruption was reflected in Germany’s business climate index which saw its steepest ever fall with the lowest reading since 2009.

Singapore was the first to give an indication of the economic impact of Covid-19. The city state economy contracted by 10.6% in the first quarter of 2020 compared to the fourth quarter of 2019.

In Japan, the ‘flash’ PMI activity indicators revealed a sharp drop in the services sector although the manufacturing sector was slightly more resilient. The Japanese government has begun discussions on an economic support package worth over $500bn featuring cash handouts to households to cope with Covid-19.

Brent oil slumped to a 17-year low of $23 as more countries enforced lockdown measures.

Finally, you are not alone. As we write, a quarter of the world’s 7.8bn population is living under restrictions to curb Covid-19.

As a pleasant distraction, can you identify this song from the lyrics?

Rise up this mornin’
Smiled with the risin’ sun

We’d love to hear from you!

Read Last Week’s Alpha Bites – Its Life Jim

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It’s a Lovely Day Tomorrow

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