11th May 2020
Phase II kick-off – from staying home to staying safe
Last week was a short week for most regions. Friday’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.
Who pays and repays our way out of the crisis?
On a global scale, government spending is at historically high levels and only comparable to the spending
incurred by World War II. With economies around the world shut down, policymakers have been rolling
out huge fiscal packages to ensure businesses and individuals get through the tough times. But with
businesses in hibernation, the cash drain through the bump-up in spending will be worsened – in the short
term at least – by falling tax revenues. Most governments agree that the combined budget hole this opens
up needs to be filled with public borrowing, and that this debt will have to be financed by huge monetary
interventions from central banks. The UK, US, France and Spain are all expected to end this year with debtto-GDP ratios of more than 100%, while the figures for Italy and Japan are 160% and 237% respectively.
US 2020 election – do markets care?
US presidential elections are global events. Such is the outsized importance of the US in the global economy
that, in a normal election year, the race for the White House is always one of the most closely watched
stories for capital markets. Of course, there is nothing ‘normal’ about this election year. The global
pandemic, and the forced economic hibernation it has brought, dominate the global news-flow to the
exclusion of virtually everything else. There is less than six months left to run until America visits polls
(assuming in-person voting is allowed). But the election on 3 November is not just about the presidency:
all 435 seats in the House of Representatives and 35 out of 100 seats in the Senate will be contested.