Our Views on the Markets and the Economy

Is the Covid-19 crisis a Black Wednesday moment for the Government? In September 1992, sterling was forced out of the Exchange Rate Mechanism. The fact that this devaluation was inevitable whoever had won the general election did not matter.

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Six Areas Influencing Markets Now

Our lack of understanding of the coronavirus has added to the challenges confronting politicians and policy makers in recent months, and this in turn has fed the uncertainty impacting financial markets.

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The extension of the lockdown was understandable. Over the last week, however, fear created by talk of a second wave of the virus has fed pressure to extend the lockdown.

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A lockdown is necessary to limit the spread of the virus and save lives, but it is not feasible or practical to prolong it for too long. A long lockdown will wipe out large swathes of the economy. There will be a negative impact both financially and mentally on too many people.

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Last week saw a headline grabbing rally in equity markets. Despite this, there is still considerable near-term uncertainty about the outlook for markets. This is highlighted by the continued low level of bond yields, reflecting the global recession that we are probably already in and policy rates that have fallen to close to zero, or below, across most western economies.

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The UK is already entering a deep recession. The Chancellor has made a good start with a policy he has described as timely, targeted and temporary. This policy is, however, still too timid and needs to be titanic in scale. So far so good, but far more needs to be done.

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How Should We View the Economic Outlook?

How should we view the economic outlook? The key question, as I see it, for the markets, is whether we will have a slump, recession, or a recovery. Is it an L-shaped, U-shaped or V-shaped economic outlook?

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Budget Preview

The economy needs a large and immediate fiscal boost. The latest collapse in bond yields reinforces the attraction of using the maximum possible fiscal levers to stimulate the economy.

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The predicament we face now is unlike 2008, which was a Global Financial Crisis (GFC). This is a Global Health Crisis. Then the focus was on addressing financial issues. Now the focus is about addressing health issues.

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UK Outlook

The outlook for UK assets and markets is being driven by many factors, both global and domestic in nature. The most important immediate influence is global, the developing Covid-19 coronavirus.

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