The UK’s Budget boost falls flat as coronavirus wreaks havoc once again

The show must go on, coronavirus and all, hence why the UK’s Budget, the first for new chancellor Rishi Sunak, went ahead as planned today. The Budget came after an emergency rate cut from the Bank of England early this morning, this had long been expected by financial markets, and made little impact on the pound or the FTSE 100. In a nutshell, this Budget is anti-austerity, coronavirus-fighting and big spending. 

Fiscal largesse could boost the FTSE 250 

The era of austerity is over for the UK. In normal times this Budget, which pledged £12bn of spending to fight the health and economic consequences of the coronavirus, along with £18bn of spending on public services that had been earmarked late last year, would have been welcomed by the financial markets, however, these are not normal times, and the FTSE 100 has been dragged lower by deep declines in the US. Interestingly, the FTSE 100’s decline on Wednesday, it was down 1.6% at the time of writing, is less than the 4% - 5% decline in US stocks, suggesting that for now the Budget may have provided some cushioning to the UK index. The FTSE 250 index has outperformed the FTSE 100, and is down less than 1% on Wednesday, as the financial market chooses domestic focused companies over the larger blue-chip indices within the FTSE 100. 

What next for stocks 

After the panic sell off on Monday, we have seen a very uneasy calm descend on markets. While there have not been repeat declines of the same magnitude that we saw on Monday, stocks continue to fall, US stocks slid between 4 and 5% on Wednesday, as the US government support for the economy is seen to be lacking. At this stage, there is not enough conviction in the market, or containment of coronavirus, to trigger a descent relief rally in global stock markets, and we expect further declines. However, after a near 20% decline in the Dow jones, which is officially bear market territory, it is probably a good time to look to the future and try to come up with a strategy about what might happen next. Goldman Sachs analysts have called an end to the 11-year bull run for stocks and said that they expect further declines over the next few months, with stocks expected to fall roughly 30% from their peak in mid-February. However, bulls shouldn’t lose heart, GS analysts also expect a big recovery in the second half of this year and for the US ‘s S&P 500 to end 2020 at 3,200, roughly where it started the year. Their argument for the big recovery for stocks later this year makes sense to us: a likely end to the coronavirus pandemic, extremely low interest rates globally, other central bank actions to boost lending and the money supply, along with fiscal largesse from Europe, the US and China. This is a powerful trifecta of events that could fuel a decent stock market rally later this year. 

While there are still pockets of volatility, in the absence of a decent fiscal stimulus for the US economy, especially compared to the packages announced by the UK, Italy and potentially also for France, then we may see some differentiation in stock market performance, with European and Asian stocks selling off at a slower rate than their US counterparts. Added to this, US stocks reached higher peaks compared with some European indices, thus they may have further to fall. 

What is gold telling us 

The gold price is also worth watching, it experienced a small decline on Wednesday, even though US stocks continued to plunge. Gold has failed to breach the $1,800 level, for now, even though the World Health Organisation has officially declared the coronavirus outbreak a pandemic. This is worth noting, while gold is still likely to remain in high demand during the Covid-19 crisis, the fact that investors are not willing to push it through key levels like $1,800 is a sign that some rationality may have returned to the markets and that the panic phase of the sell-off may be behind us. Risk appetite remains sensitive to fresh news about the outbreak, however, if cooler heads are prevailing, then we could see some selective buying of stocks over the coming days. Some stocks that have attracted decent interest from buyers in the middle of the week include Tullow Oil and Cairn Energy in the FTSE 250. Tullow was up more than 10% today, while Cairn Energy was up 5%. This comes even though the oil price has remained volatile, Brent crude fell 5% today, and remains around the $35 per barrel mark. Thus, some investors may be taking the view that smaller oil companies are looking cheap, even if the oil price remains subdued. UK housebuilder Balfour Beatty, also a member of the FTSE 250, was up nearly 20%, as housebuilding was given a boost from the Budget. In the FTSE 100, there were some decent gains for UK banks, with HSBC and Barclays some of the biggest gainers, as the government guaranteed a package of loans to help small and medium-sized businesses through the coronavirus. Airlines, holiday companies and some retailers remain the biggest losers on the FTSE 100 as official lockdowns loom across the Western world, threatening air travel. Retailers such as Next were also under pressure, its share price fell 5% today, as did H&M’s share price. In the eye of a global pandemic, the market might be thinking that people are less likely to spend money on consumer discretionary items like fast fashion. 

To conclude …

To wrap up our coverage of stocks, we believe that there could be further downside to come, even though the worst of the sell off may be behind us. There could also be some selective buying opportunities, particularly in the FTSE 250, which is set to benefit most from the UK government’s package of measures to protect the economy from the ravages of the coronavirus. However, some sectors remain highly exposed to the uncertainties caused by the outbreak, including airlines, leisure companies and holiday firms. It’s hard to imagine why anyone would want to buy a cruise ship operator in the current environment, after mass quarantines on cruise ships, the future for the entire industry remains uncertain.  This is why Carnival Corp, one of the world’s largest cruise ship operators, has fallen more than 50% to its lowest level since 2009, and continued to fall today. 

Why the euro rally might be over 

In the FX space, the euro has pulled back sharply in the last two days, dropping from $1.1435 to $1.1250. This was inevitable, as Europe reaches a critical stage in the fight against the coronavirus, and the economic damage is likely to be severe. Ahead this week is the ECB meeting. It seems highly unlikely that the ECB will fail to act to support the Eurozone’s economy. There is a high chance of a small cut to the interest rate, which is already in negative territory, added to that QE could be extended and enlarged (even though it was increased just before Christmas), and easier access to loans for national governments is also likely to be announced. We would also expect the ECB to put pressure on European governments to add fiscal stimulus to boost the European economy and help it to weather the current storm. Overall, we believe that the ECB meeting is likely to be bad news for European banks, and the euro may see further declines in the short term, unless the ECB, unexpectedly, doesn’t take action tomorrow. Key support levels for EUR/USD include $1.1110-20, ahead of $1.10. 

Overall, the UK has taken its first step to defend its economy from the effects of coronavirus. This could become a blueprint for the US and Europe, who have been slower to act. Overall, the UK’s budget combined with a potential slowdown in the rate of a stock market sell off could boost domestically focussed companies, particularly on the FTSE 250.