The news cycle has moved on over the weekend, with the headlines now concentrating on plans to get people back out of confinement and try and get the system working again.

Spain is the first European country to begin easing the restrictions that it has had in place, with people in certain sectors allowed to return to work, though they must adhere to strict safety measures, whilst Italy will begin easing up on the lockdown today. Italy isn’t going as far as Spain and will only allow a few different shops to open until at least May 3rd, when it will once again review the situation. Cases in both countries have consistently fallen in the last week.

France looks a little behind both countries and President Macron isn’t going to let the country get moving until May the 11th. Even further behind is the UK, where less draconian measures have been implemented and this might have left us with a longer time in lockdown. An interesting point made on the Andrew Marr show on Sunday was that the people dying in hospital now are those that contracted the virus before we were even on lockdown, meaning we’re still some days away from the peak and knowing how effective the shutdown has been, as we would expect to see cases dropping quite dramatically from now on if the lockdown has been effective. Dominic Raab will confirm later this week that we’re going to be locked down for another three weeks, at which point the government will review – so the earliest point at which we can consider life starting on the slow grind back to normality will be the 7th May (though that’s the day before the May bank holiday and they probably won’t want to let everyone breathe a sigh of relief an head out en masse over a bank holiday)

The balancing act of safety versus economy is the one that ministers are struggling with and there are plenty calling for an earlier return to work, particularly as forecasts for the UK GDP slump in April to June range between a 10% and 30% fall in output. Adding to that fall are further reports on just how little of the government’s promised bailout money is reaching business: Apparently only 1.4% of those enquiring about Covid continuity loans had been able to secure them. The Treasury wants to grease the wheels and we’re expecting more from them this week, however one of the largest criticisms has been that because the government is only underwriting 80% of the loan and not its full value, banks are still reluctant. The Swiss are the leading the way in getting loans to businesses quickly and the turnaround time there can be as little as 30 minutes from application to funds being deposited. The government are also underwriting 100% of the loan and forcing banks to use a standardised loan form. Germany have now made the switch to 100% guarantee as they were finding the banks over there more reluctant than they’d have liked.

Germany might be showing some leadership with its own financing, but it’s still not doing much to help the Euro area as a whole. There was a fairly limp agreement made last week between the countries to use the bailout funding mechanisms already in place to help and also talk of the possibility of having a redevelopment fund once this is over, but the lack of mutually insured intervention will mean that countries have no choice but to load up on debt in their own name. Having to do this will mean that some countries will only borrow as little as they feel they can get away with, which probably won’t be enough to kick start their economies once this is over. So what they’ll have is falling GDP and rising debts which might end up leading to downgrades. Countries like Italy, Greece and Portugal can’t really afford too much in the way of downgrades, because they’d quickly slip into junk status. If they did that then would the ECB still support them (and if they did, at what cost?). We can see this turning out like the Greek debt crisis of 2011-2013 if Europe isn’t careful, but possibly with a different final outcome.

Over in the US, we’re once again completely relieved that Donald has it all in hand; POTUS has claimed total authority over lifting the restrictions and he wants to get to work quickly. This comes despite state governors actually being the ones that have the power to get things done and their plan seems to be to split into regional working groups and decide their own timelines for getting the US back to work. Mayor of New York Andrew Cuomo has said that the worst there is over but that the smart move is to get people healthy first and then get back to work. He also had another rebuke for Trump by saying that the hard decision isn’t the reopening, it was shutting it down in the first place, which Trump didn’t do and that it was the governors and himself that made those calls.

US earnings season is just about to start and will give investors a bit of a glimpse into what this shutdown is doing to profits in the US. It will be a test for the stock market to get through, but our money would be that the market weathers the test and explains away the dramatic falls in profits this time round. However the bigger test will be in September when markets see the full effects of this and the likely lack of too much in the way of a rebound. There’s enough money in the market looking for a home for now to keep things ticking over, but does that change when people start to see how much of an impact this has had to some businesses business model – Boeing is the easy example, how is their business going to rebound from this in six months? – and will that lead to another price correction as reality dawns?

Looking at the week ahead: All this talk of re-opening has put a bit of a risk-on tone to equity markets and in turn currencies are seeing the shifts out of safety and into more normal allocations. An exception to the rule is oil and despite the sort-of agreed deal to cut output by 10 million barrels per day, the overriding fact that demand has reduced by three times that hasn’t gone unnoticed and prices are back down and look to be heading lower. A mid-month week is normally pretty data light and this week is no exception, the difference at the moment is that the only reason to look at the data is to remind yourself that your predictions of how bad it all is are far too optimistic.

Be well


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