A historic day for the UK Treasury yesterday as they made a bond issue at negative rates for the first time ever. The £3.8bn of three year bonds was a fraction below 0% and was actually oversubscribed by the market, meaning there’s appetite from investors for more of the same – a welcome relief to everyone that’s writing these massive stimulus cheques. The timing of the issue was coincidentally just after UK inflation data showed that we’re now back down to our lowest level in four years, with further drops likely. This news brought back into focus the chat of late that the Bank of England might turn negative on rates (and possibly sooner rather than later) and therefore gave bond traders the view that getting in on a bond issue that is only a fraction below zero might actually look like good value further down the line.

The inflation numbers weren’t exactly a shock given the backdrop, but they are still worth covering: The fall from1.5% in March down to 0.8% in April was the sharpest we’ve seen in more than 10 years and now the deputy BoE Governor has said that the index could turn negative by the end of the year. However the issue we have at the moment with the accuracy of inflation is that there are some sectors that will be guesswork – how much has a restaurant menu item increased or decreased in the past few weeks? Pass, they’re closed. Hotels are still showing their rack rate on rooms, but nobody is staying there. How much is a theatre/concert ticket? Etc. – perhaps this is already factored into their thinking and once we come out of lockdown then these items’ prices will quickly adjust to market forces – though which way is hard to say; much lower to entice your customer back, or much higher to cover the costs of a socially distanced activity.

Retailers in a lot of spaces have already put some significant discounts on their online stores, but the physical re-opening of shops is likely to mean even bigger price cuts as they try and sell through their summer stock in record time to make way for autumn and winter stock. Stores will be eager for cashflow and also want to avoid paying additional warehousing costs for any stock they want to hold back for next year.

Airline bailouts have been a contentious subject, but Germany have come to the rescue of Lufthansa. Much like in the UK, the state getting involved in rescuing airlines has been a subject of much dispute, but Spiegel are reporting that the German government will take a 25% in the airline and provide it with additional capital to the tune of EUR 9bn. There are still hurdles to jump with shareholder approval and the formalities on the government’s side, but we can’t see shareholders being able to negotiate anything more in their favour. The deal, in the long run could be pretty lucrative for the German taxpayer and for the wider airline industry sets the benchmark for a government getting involved in a previously independent airline – Virgin must be chuffed.

In US air travel; South West Airlines said they see a small glimmer of hope as bookings have now outweighed cancellations – though demand is still down by 92% compared to May last year.

Across the Pond: The Senate has passed a bill that would force Chinese companies wanting to list on US stock exchanges to be comply with their accounting and regulatory standards. It’s not certain whether the bill will get through the House of Representatives, but if it does it could also mean a number of firms that are already listed having to de-list from the exchanges. Trump said earlier in the week that as much as he likes the idea of introducing the rules, it would only mean that these firms go and list elsewhere in the world. China has scorned the move and said it will take “necessary measures” in response.

The news was understandably seen as a negative for US-Sino relations, which in turn meant markets took a risk-off approach as we went into the US close and into the Asian session overnight. Previously the day had looked pretty good and the week overall has been fairly positive for those long in equities. Oil markets too have been pushing on, with front month contracts up to the mid $30’s per barrel.

Today’s data from the UK to watch is the Purchasing Managers Index preliminary reading for May, in both manufacturing and services sector. The numbers are expected in at 37 and 24 respectively and there will be market reaction if it comes in wildly above or below that guesstimate. The US gets more jobless data, but we know now to take that with large handfuls of salt, as their systems just aren’t up to the job of handling all of the claims. The government has another gilt auction today, this time with an eight year maturity, so we’ll be keen to see how little investors are willing to accept by way of return on investment on that one.

Be well.


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