The UK lays foundations for a further relaxation of restrictions
As the UK looks towards a further relaxation in lockdown restrictions, it was announced today that the anticipated UK track-and-trace system will be in place by 1st June. The system, which facilitates the tracing of new infections, will be capable of dealing with 10,000 new coronavirus infections per day. The Prime Minister has previously said that the system is essential to lifting the UK’s lockdown, and will be vital in helping to persuade teachers’ unions to tell their members to return to work, allowing schools to reopen next month.
The next review is due to be held on 28th May, with any amendments likely to be enforced in time for the 1st June. The government has stressed however, that the data must continue to support a reopening of the economy, with the virus remaining under control. The second step of the phased return to normality includes the reopening of schools, non-essential retail and more local public transport. The guidance varies between countries within the UK however, with Scotland, Wales and Northern Ireland officials adopting a more cautious and slower stance to reopening.
Potential for further monetary stimulus
According to ONS data published earlier today, UK Inflation slowed to the weakest level since 2016 in April, as energy prices fell and the coronavirus lockdown put the brakes on economic activity. While the slowing of consumer price inflation to 0.8% was not unexpected, the prospect of persistently low inflation will fuel speculation that more action is needed from the Bank of England (BoE), intensifying the debate among policy makers over potential for negative interest rates in the UK for the first time. Ahead of the June MPC meeting, alongside speculation over possible rate cuts, BoE Governor Andrew Bailey’s comments in recent weeks suggest that we could see the central bank extending bond purchases for as long as needed, creating an open-ended commitment as the Fed and ECB have effectively done. Monetary policy is expected to remain supportive for an extended period, creating a strong backdrop for a recovery in UK assets in the medium term.
Brexit negotiations return to the spotlight.After taking a back seat in recent months amidst the coronavirus pandemic, the B word (Brexit) has been back in the headlines this week, as both sides forge on with negotiations via remote trade talks.
According to UK officials, the UK remains optimistic about striking a trade deal with the EU, however with limited progress being made, time is running out, with the current transition period ending on 31st December. For the EU, recovery is obviously first on the agenda for all member states, and a trade deal with the UK is not something that needs to be addressed urgently. At the same time, Brussels have said that they perceive a lack of top-level political engagement in negotiations while Britain also remains focused on dealing with the immediate coronavirus threat.
Amid the coronavirus pandemic, with both the UK and EU grappling with a significant negative shock to their economies, the Prime Minister has faced calls to consider asking for an extension to the transition period to avoid the UK having to trade on WTO terms with the EU from the end of the year. While current levels of progress would be unsurprising in “normal” trade talks, the accelerated timetable and political attention being consumed by coronavirus has raised questions about whether a deal can be made by the end of the year. However, the government has reiterated its stance that an extension is not up for negotiation. The EU argues that ratification is going to be extremely complex at the end of the year, with officials now unable to plan for the speedy ratification they were hoping for, and everyone’s currently distracted.
As talks continue, the EU has accused Johnson of backsliding on promises to uphold common standards on the environment, health and workers rights. It has also insisted there will be no trade deal without an agreement on fishing rights, a key point of contention in talks. The Irish border issue has also flared up again as Britain sets out how it will implement the part of the Brexit agreement covering Northern Ireland, with the EU insisting on checks on goods moving to Northern Ireland from Great Britain. The European Commission warned negotiators this month that time is running out, and pressed Britain on the “urgent need” to provide a “detailed timetable”.
Positioning
Despite the negative economic impact of the lockdown on the UK economy, as the UK moves forward with plans to reopen the economy and lays the foundations for tracing new cases to prevent a second wave of infections taking hold, we are becoming increasingly positive on the outlook in the medium term. Moving further into the year, we expect to see more turbulence in Brexit negotiations, however neither side are currently in a place economically to walk away from talks. It is also becoming increasingly likely that with leaders distracted by the crisis for a large portion of the year, we will see either a preliminary deal including a further implementation period or an extension to the current period at the end of the year. As the focus remains on the current crisis and the recovery, Brexit risks are likely to be weighted to the last quarter of the year, by which point we should be seeing a recovery supported by loose monetary conditions and fiscal stimulus.
For information on European efforts to return to normality and progress made in containing the virus across the continent, please see the attached Market Update document.
Key Events We Are Watching This Week:
• Thursday: European PMI Flash Data for May, US Jobless Data
• Tuesday: UK Retail Sales for April
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global stock markets remained highly volatile over the week as the global economy grapples with the Covid-19 outbreak. Over the week, index performance remained mixed as optimism over a recovery in economic activity and central bank movements attempted to offset concerns over near term weakness.
Following the implementation of portfolio allocation changes earlier this month, the portfolios gained over the week as the portfolios benefitted from a high level of diversification, with equity and bond assets gaining over the week. Over the coming weeks, as we are now normally invested, we expect intraweek performance to be more in line with the benchmark once again, and we are optimistic on the medium-term outlook from here. The recent drop in portfolios and indices is hugely disappointing, however we remain optimistic about a growth pickup in the second half of the year, allowing us to regain lost ground.
Important Information
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 1609, Shakespeare’s sonnets were first published in London, perhaps illicitly, by publisher Thomas Thorpe. Nineteenth-century critics thought that he might have published the poems without Shakespeare’s consent.
Have a great week and stay safe,
Jason & Gina
