MARKETS REACT TO FEDERAL RESERVE REALITY CHECK

MARKETS REACT TO FEDERAL RESERVE REALITY CHECK

This week we saw the markets take a rare glance at reality, after US Fed chairman Jerome Powell gave a fairly negative assessment of the economic outlook, presumably having just looked outside. This caused a large reaction with markets selling off about 5 per cent. Most investors appear to have decided reality isn’t for them, however, as equities are climbing again. While on the surface it seems unfathomable that the FTSE would be up the same day it was announced the UK economy shrank by 20 per cent (although this could change quickly), we hope central banks can continue to keep the money flowing lest we add a market crisis to an already long list of real world problems.

Elsewhere, real-world problems keep escalating. A recent uptick in Covid-19 cases in the US correlates well with the easing of lockdown and talk of a second wave has started before the first wave has even passed. Locally we’re enjoying some classic no-deal Brexit talk, but the reality of coronavirus and recession will surely mean previous positions will need to be redrawn.

EQUITIES: ROLLER COASTER WEEK FOR WORLD STOCK MARKETS

The S&P 500 turned positive for 2020 on Monday and the tech-focused Nasdaq index hit an all-time high on Tuesday before the breakneck market rally came to an end and a sharp sell-off took more than 5 per cent of both indices yesterday.

Thursday’s drop in equity markets was the biggest drop since the extended sell-off in March and is a sharp reversal of the positive investor sentiment that has seen US markets rise around 30 per cent since 23rd March when the S&P hit its low point for the year so far.

The rapid change of direction seen this week has been pinned on this week’s interest rate meeting at the US Federal Reserve, which predicted no interest rate increase until 2023 and an extended economic recovery with slow job creation. The sell-off was seen in equity markets around the world. The MSCI All Country World index fell 4.6 per cent and in the UK the FTSE 100 capped 4 days of consecutive losses with a drop of 4 per cent.

UK: RECORD FALL IN GDP AS APRIL SEES 20% DROP

The scale of the damage done the UK’s economy by the coronavirus shutdown became even more apparent with the release of April’s GDP numbers. The latest data from the Office for National Statistics show the monthly GDP figure for April

was down 20.4 per cent, following a drop of 5.8 per cent in March. Monthly GDP numbers can be volatile but the figure for the rolling three-month period to the end of April saw GDP drop 10.4 per cent. The fall is the largest since records began.

The decline was led by a sharp drop in construction output, as well as steep falls in retail sales, transport and hospitality. The size of the drop was dramatic but the breadth of the contraction was also eye catching. Almost all sectors of the economy saw activity decline over the three-month period. The only manufacturing sector to see any growth was pharmaceutical products and the only services sector to register growth, public administration and defence, grew by 0.2 per cent.

OCADO: £1BN FUND RAISING AS ONLINE GROCER SPIES OPPORTUNITIES

Shares in online supermarket Ocado have seen stellar recent performance as online food retail is one sector to see no interruption to demand during lockdown. The online supermarket and distribution technology provider’s rapid share price

growth of the last three years has continued in 2020. Ocado shares are up 58 per cent so far this year, including this week’s retreat in UK shares generally.

This week the company has taken advantage of positive sentiment to raise a further £1bn, in a combined share sale and convertible bond issue, to add to the £1.3bn it has raised since 2018. Ocado aims to capitalise on the surge in online grocery shopping and add to the recent distribution deals it has signed in Canada, France, Sweden, Japan and with M&S in the UK. Ocado has long seen itself as a growth tech company rather than a supermarket and with only two years of profit in the last 20, investors appear to be buying into the growth story rather than the company’s own modest performance as a retailer.