New article from Tatton Investment Management: Most welcome, if feeble, signs of pulling together

This has been a short week for most regions. Tomorrow's VE day holiday here in the UK was labelled 'Victory in Europe' in 1945, and marked the huge victory against the forces of tyranny and isolating nationalism. We know those forces are not dead, however. In the face of a terrible external threat, victory can still only be achieved together as nations. The effectiveness of lockdown at the micro (community) level is not only about structures (stay at home) but requires individuals to also behave appropriately (staying safe). Similarly, at the macro (national) level success over a mutual enemy requires consideration of our neighbours as well as ourselves. We must trust that our neighbours think likewise, and choose to act responsibly in the spirit of that collective goodwill.

Much of what has occurred this week has reminded us of this theme.

Among the reasons that the British public decided to leave the European Union (EU) was an impression of its fragile structure failing amid a weakening common purpose. On Tuesday, the highest court in Germany ruled that the German government had failed to hold the European Central Bank (ECB) to account for its latest asset purchase programs, which are intended to carry the EU's economy across the void of coronavirus-related inactivity. The court did not say that the recent Pandemic Emergency Purchase Program (PEPP) was a problem, nor did it say the ECB had exceeded its remit, but reading between the lines we deduced that the European Monetary Union (EMU) would do better to address its structural weaknesses through a common mandate, rather than 'muddling-through' yet again.

The ECB was given three months to provide explanations. The markets did not see the ruling as great for Europe but while it clearly raises some risks to the continuation of printing euros to fund asset purchases, the ECB should be able to satisfy the court's conditions.

Despite the court not questioning the PEPP, the program's major beneficiary had been Italian Government bonds (known as BTPs). Before the intervention, bond investors started selling BTPs, with the spread against (the interest burden above) ten-year German bonds widening by 0.25%, the ten-year BTP heading back to a 2% yield. For Italy, and Europe as a whole, not disastrous but not helpful.

We talk about the role of central banks creating/printing money to fund short-term government spending in the following article. In normal times, most people (and here we count old-fashioned economists in that group) would think that printing large sums of money is poison for an economy and its currency. Surely then, if the ECB is to be kept away from its printing press, the Euro should rise?

As the graph above shows, the Euro has been falling. At least in the short-term, investors appear to see printing money as a medicine, not a poison. This medication may have side-effects if taken too long but, right now, there is no other remedy.

Faced with the task of rescuing the European economy from the brink, policymakers might consider the court's ruling and the market reaction as an opportunity to use the shared experience of the coronavirus to revive the sense of collective purpose and solidarity among eurozone citizens, and to finally fill some of the conspicuous gaps that the structure of the common currency has suffered from since the start. A commonly funded, post-virus 'reset and rebuild' investment program might be a good starting place.

The coronavirus has been damaging to the world's health in so many ways. Here at Tatton, we believe it will pass without leaving the world in an irreparable state. But its effects will linger, especially in its impacts on national relationships. As we ended 2019, much of the new-found optimism revolved around a thawing relationship between the US and China, and the establishment of the 'Phase 1' trade deal. 'Phase 2' was expected to emerge in the first half of this year. However, the virus put paid to face-to-face negotiations. The finger-pointing, the clear rise of American anti-China rhetoric (on both sides of the political divide) has been more damaging. Economists have been forecasting a very tepid bounce in the global economy based on the expectation that tariffs might remain in place. Indeed, the strength of ill feelings has led to concerns it could get worse.

It was encouraging to hear the news this morning, that US-China Phase 2 negotiations will be restarting next week over the phone. That said, we should not get ahead of ourselves. Negotiations last year were decidedly bumpy, and we should expect a similar passage now. No 2020 US presidential candidate will benefit from being seen directly as China's friend during the election campaign, but Donald Trump will benefit greatly if the US economy is bouncing strongly. Indeed, we can expect him to shout about how tough he has been, while trying as hard as possible to close more deals. Every incumbent benefits over his rival by having the power to actually do things, especially if they are seen to be successful, as Richard Nixon's visit to China in 1972 (and subsequent re-election) duly proved.

Trump may be able to blame a recession on somebody or something else, but he would much prefer to have exited recession well before the 3 November election day. Restarting the US economy and getting people back to work as soon as possible increases his chances. It is accepted that virus cases will spike again. Trump may well have been advised the spike will be 'containable', but he will be a hostage to fortune to some degree.

We thought the UK's progress away from lockdown would happen by Friday's bank holiday, but sources say that Sunday is more propitious for an announcement. As mentioned last week, opening-up will be slow, and the emerging, if temporary new normal will remain painfully different to what we are used to. Meanwhile, markets are benefitting from the global monetary infusion and their ability to look across the void to a more distant point in the future.

Nevertheless, we are entering a different phase in the days ahead. The loosening of lockdowns means a partial restarting of the wider economy, but also the chance of rises in reported cases. That may increase the risk of restrictions being tightened again. As such, markets could find the going to be quite a bit heavier - they may have to transition from not worrying too much about the present to having to gauge the likely speed of recovery once extraordinary support measures are gradually withdrawn. For this brave new experience to be successful, good behaviour - and a commitment to ensuring everybody 'stays safe'- will be required from citizens, communities and governments. Fingers crossed.