EQUITY MARKETS CONTINUE TO PAY LITTLE ATTENTION TO BLEAK ECONOMIC DATA

EQUITY MARKETS CONTINUE TO PAY LITTLE ATTENTION TO BLEAK ECONOMIC DATA

This week the uncertainty of our times was on full display when we got to witness the juxtaposition of headlines decrying the worst recession in Europe alongside market tickers showing UK equities flying. It was a clear demonstration of markets’ break with reality as they got excited in the first half of the week on rumours of vaccine breakthroughs and extra stimulus spending, before giving up hope in the second half. Meanwhile back on earth, things continued to deteriorate. While there does seem to be progress towards a medium-term solution, it’s hardly worth shifting hundreds of billions of pounds in and then out again. Brokerage fees may end up being the bright spot in the economy.

Elsewhere the US election began to enter investors’ minds after Joe Biden announced Kamala Harris, the senator from California, as his potential vice president. Described as the safe pick, she was derided as too centrist during her brief run as a presidential candidate, with “Kamala is a cop” a popular insult levelled from the left. Meanwhile Donald Trump immediately accused her of being a radical liberal, so something for everyone.

UK: DROP IN Q2 GDP BIGGEST ON RECORD

The UK officially entered a recession as economic activity in the UK fell by 20 per cent in the second quarter of the year. The drop in GDP has been much steeper than other major European economies, with Germany, Italy and France all recording substantially smaller reductions.

The UK’s contraction reflects the severity of the coronavirus outbreak. The UK was later to lockdown than many comparable countries and so the outbreak resulted in more infections and a higher mortality rate. It also meant the country began to emerge from lockdown later so the economic damage was pushed from Q1 into Q2. Italy, Spain and France all saw GDP fall by 5 per cent or more in Q1, compared with 2 per cent for the UK. The positive news is that GDP started to recover in June as Britain began to emerge from lockdown and monthly GDP was up 8.7 per cent month on month. This has been matched by a rebound in consumer spending, with spending in July getting back to pre-coronavirus levels.

BONDS: CORPORATE BONDS SET NEW RECORD LOW YIELDS

Central bank stimulus has pushed bond yields to record lows and is causing investors to continue to support bond issues with record low yields. This week has seen new record low yields for both investment grade and high yield corporate

bonds. Visa issued a $700m 7-year bond with a coupon of 0.75 per cent, just over a week after Alphabet sat the previous record low as it raised $10bn on a range of maturities. Alphabet achieved yields of 0.45 per cent on its 5-year bond and 0.8 per cent on its 7-year bond.

Issuers of junk rated bonds are also reaping the benefit of central bank stimulus, at least at the higher end of the high yield market. This week BB-rated aluminium can maker Ball Corporation was able to raise $1.3bn in a 10-year bond paying 2.875 per cent, the lowest recorded rate for a high yield bond.

TUI: TRAVEL HAS BEEN ONE OF THE BIGGEST CASUALTIES OF COVID-19

The rapid reintroduction of travel restrictions on some of the UK’s most popular overseas holiday destinations have added to the travel sector’s problems. This week travel company TUI said it raised a further €1bn to add to the €1.8bn it

has already borrowed this year to help it through to 2021. In its latest earnings update the company revealed it has lost €2.3bn in the nine months to June. The loss for the last quarter alone was €1.5bn as revenues fell 98 per cent.

Bookings are up for next summer but many people are rebooking trips that had been planned for this year and overall the company is shrinking capacity for next summer by 20 per cent. The company has already announced 8,000 job losses to cope with this year’s downturn and it plans further cost savings of €300m over the next three years. TUI’s shares are down around 3 per cent this week and around 68 per cent in 2020.