27th January 2020
The quiet period of Christmas and New Year has definitely ended. Davos World Economic Forum, Chinese Coronavirus, Q4 earnings season, central bank deliberations, first batch of 2020 business sentiment figures and – you guessed it – the next steps in the Brexit process have all provided plenty to think and write about, and to discuss. We suggested last week that, following the strong 2020 start in stock markets, it was quite possible that a period of consolidation might lie ahead. Sure enough, this week markets lost their vibrance and moved sideways to slightly down.
Wuhan virus makes global markets sneeze
Nothing captures the mind and our apocalyptic imagination quite like a viral outbreak. We could hazard a guess that viruses feature in more doomsday movie plotlines than meteors, nuclear war or any of the sort. The coronavirus outbreak in the Chinese city of Wuhan ticks many of the scare boxes: an (as yet) untreatable disease with uncertain effects originating in a densely populated and globally connected city.
At the time of writing, there have been 26 deaths and 870 cases reported, both 50% higher than yesterday. This is enough to evoke the memory of the SARS crisis in 2003. Back then, China struggled to deal with a rapidly spreading respiratory disease of unknown origin just as the country headed into its new year festivities.
UK housebuilders – from dogs to darlings
Changes in the housing market grab headlines in the UK. This makes sense: those who own homes (or want to) have a vested interest in the value of property. In economic terms, there is another reason: more so than most economies around the world, the UK economy is underwritten by its housing market.
Britain has a high current account deficit – meaning we import much more than we export. As a percentage of GDP, it is nearly double the US deficit. Our economy is also hugely reliant on domestic consumer demand. These things can only be sustained through a high level of private borrowing, but consumers’ willingness to take on debt (and their ability to pay it back) is only possible if they have a strong asset-backed balance sheet. For most people, assets on their balance sheet means property. That is why economic policymakers keep such a close eye on the housing market – and why it generates so much news in the financial press.
A ‘wall’ of central bank money propelling up stock markets?
In mid-September 2019, the US central bank (the Fed) began injecting considerable amounts of short-term liquidity into the Wall Street money markets to counter a global shortage in the availability of transactional cash. This cash shortage had manifested itself by a steep rise in overnight interbank lending rates in the New York market at a time when there was no good reason for banks to not want to lend to each other – i.e. other indicators of interbank credit risks were actually declining.