With Coronavirus taking centre stage in the news, it is easy to overlook other significant events occurring. This week, CIO Question Time addresses interest rate cuts, the US election and Brexit, as well as Coronavirus.
In recent weeks, market sentiment has been dominated by news of the spread of the COVID-19 Coronavirus and the response from governments and central banks around the globe. We have seen an unscheduled 0.5% cut in interest rates from the US Federal Reserve following an emergency call between members of the G7 on Tuesday. Other central banks have also cut rates this week, including Canada and Australia. Lower interest rates may help support asset prices and encourage spending in the long term, but do relatively little to counter the impacts of the virus and support the economy in the short term. Over the coming days, we will be looking to see if governments around the world will increase fiscal spending with the aim of providing more short-term support. On Wednesday next week, the UK government will release details of their Budget plan, which will be followed closely.
Low bond yields make equity markets look relatively more attractive over the long term. Importantly, the longer-term outlook is likely to be affected by events largely unrelated to Coronavirus. The revival of Joe Biden's campaign for the Democratic Party Nomination in the "Super Tuesday" primaries reduced some of Wall Street's fears from Bernie Sanders' left wing agenda. Trump appears to prefer to take on Bernie Sanders, who would polarise opinion and would be unlikely to sway Republican voters who dislike Trump. For those swing votes, Biden as a more centrist candidate would likely stand a better chance against Trump. Biden would also be better for the economy and the stock market than Sanders. The presidential election will continue to be contentious. The currently strong US economy favours Trump's re-election, but if the Coronavirus impacts the US economy and it begins to slow, voters may yet turn on Trump, giving hope to the Democrats.
Last week, the UK and EU set out their positions ahead of their post-Brexit trade talks, which started on Monday. From both the pre-negotiation papers and Michel Barnier's briefing following the first round, it is clear that there are a number of areas where there is a convergence of views. However, we know from previous negotiations that, however many 'easy wins' there are, there are many areas where disagreement could block the entire deal, some of them relatively small. Reportedly, the UK would be happy with a deal similar to the one Canada has with the EU, but the EU has said that the proximity of the UK makes this impossible. They want the UK to be on a level playing field with the EU, and they see this as the UK following much of EU legislation, which Boris Johnson has said will not happen. The UK's reluctance to be bound by the European Commission on Human Rights, or to submit to the European Court of Justice, will be big issues to address. The UK wants to take back control of its fisheries, but the EU wants any agreement on fisheries to be based on the existing arrangement between the UK and EU. The UK document says the arrangement "is outdated, based on historic fishing activities from the 1970s"*. Fishing is a small part of the UK economy but is highly symbolic, and the UK's position is firmly entrenched. Also of symbolic importance for Greece are the Elgin Marbles, and Section 33 of the EU mandate says "the parties should, consistent with Union rules, address issues relating to the restitution of unlawfully removed cultural objects to their counties of origin". Although this does not mention the Elgin Marbles, this is widely interpreted as referring to Greek demands that they be returned. Boris Johnson has said that the marbles are going nowhere, but all 27 EU countries will need to approve the deal, including Greece.
For investors in Europe and the UK, post-Brexit trade negotiations may have more long-term impacts than the present threat posed by the Coronavirus. Similarly, the presidential election may prove to be more important for US and global investors. So to conclude, while concerns surrounding the Coronavirus will continue to dominate market sentiment as the virus spreads, and will no doubt dominate investment discussions for some months to come, it is not the only story of significance in markets.
*Source: UK Govt "the future relationship with the EU" Part 2 section 3b
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