The news is starting to improve and so are markets

Markets rallied early this week as investors anticipated fiscal spending reaching the real economy and new coronavirus case growth slowed in Italy and Spain. Whilst the overall number of cases and deaths continues to mount in Italy the growth in new cases has slowed to 4.1% yesterday a marked improvement from a week ago. Markets were also buoyed by comments from Spain that they were seeing the beginning of a slowdown in the country.

The major news is the Chinese PMI surveys, released overnight, which point to a rebound in economic activity post the lifting of the lockdown in the country. The manufacturing and the services measures both moved above 50 implying an improvement in conditions. Clearly this needs to be taken with a slight pinch of salt as the global slowdown that is expected from coronavirus will undoubtedly impact both supply and demand in China. However, the latest figures will start to add weight to the argument that we will see a V shaped recovery in the Western world once the lockdowns are concluded, particularly if fiscal stimulus provides a significant boost to activity in the interim. Overnight the Caixin PMI was published showing better than expected stabilisation in China, backing up the official figures. The broader Asia region trailed China reflecting the economic lag to other countries as China restarts economic activity in earnest.

Markets have rallied from the lows of last week based on positive changes in the coronavirus narrative so there are fundamental reasons driving the resurgence in equities. Markets need reassurance that the timeline for market lockdowns are finite, that the government will support the economy in the interim and that when the lockdown does end, that growth will bounce back quickly. The slowdown in new case growth, fiscal stimulus from the US and the Chinese factory numbers all play to these three themes and give a reason for a more optimistic footing.

Risk appetite was today impacted by the coordinated announcement by British banks that they would suspend their dividends following conversations with the UK banking regulator.

Donald Trump’s warning of a difficult few weeks ahead set the tone for a weaker end to US markets as the US’s top public health official pointed to new projections of 200,000 US deaths during the outbreak. Alongside this the US president also suggested that a large infrastructure bill could progress to Congress. Large scale infrastructure spending may be supported by Congressional Democrats but it may prove too much for Republicans already worried by the size of last week’s package. If we were to see a phase four bill come to fruition so soon after last week’s stimulus this will undoubtedly help sentiment.

Japan’s ruling party has proposed a $555bn package to help combat the economic impact of coronavirus on citizens and businesses. The stimulus would represent 10% of GDP and a sizeable increase in the scale of support from an economy already accustomed to large stimulus over the last decade.

The Federal Reserve announced that it would establish a temporary repurchase agreement facility for foreign and international monetary authorities yesterday. This will help ease the dollar shortage that we have seen over the last few weeks and represents the central bank’s eagerness to support the wider global financial system. Post the financial crisis there was criticism that the Fed was using US taxpayer funds to support non-US markets however financial stability appears to be winning the argument again in the current crisis. This facility will allow foreign central banks to deposit Treasuries with the Fed in return for dollars that they can use in their domestic financial system

It looks likely that the lockdown in some of Europe’s worst affected countries will last until the middle of May which suggests a timescale of the end of May for some restrictions being lifted in the UK. Should we see European nations continue to move towards removal of the lockdown, markets can start to extrapolate an end to restrictions. If we do see further fiscal support from the US and Japan, we expect markets to become more patient and volatility to continue to fall.

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