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Market Commentary: February 2021 - “Tomorrow Will Be A Good Day”

Posted: 24th February 2021   |   Share

By Sarah Ryman

Coronacrowds

“Tomorrow Will Be A Good Day”

UK

Vaccine rollout success and a roadmap for lifting the lockdown has boosted the pound this month.  Whilst there are some concerns over efficacy against new variants, which has triggered additional testing and restrictions in some areas, Boris Johnson has said that he is “optimistic” restrictions can end in England by 21 June but warned “nothing can be guaranteed”.  Russia’s Sputnik V vaccine has shown a 91.6% efficacy with Hungary becoming the first EU state to approve the jab, although according to an article in the FT only 46% of Russians have expressed a readiness to take it which is significantly lower than 63% willing to get vaccinated in the US and 86% in the UK. 

Manufacturing slowed in January to its lowest rate in three months as both the global pandemic and Brexit weigh on export orders.  This is particularly pronounced after December’s reading which was a three-year high but the reading of 54.1 was higher than the 52.9 forecast and still demonstrates expansion.  Service activity fell to its lowest levels since last May as restrictions continue to negatively impact.  The reading of just 39.4 in January was significantly lower than the average performance across the Eurozone which reported a reading of 45.4 and no doubt a reflection of the UK’s reliance on its service industry, which accounts for 70% of UK GDP.  The trade deficit in goods and services was £15 billion in 2020, down £11.3 billion when compared to 2019.  Even construction output has declined for the first time in eight months as uncertainty takes a toll.  UK GDP grew 1% between October and December, narrowly missing the double-dip recession that had been touted.  Nonetheless the Office for National Statistics (ONS) showed that gross domestic product contracted 9.9% last year which is the largest annual fall on record.  There have only been 15 years since 1700 in which the economy has shrunk more than 4.5% (and the financial crisis in 2009 was not one of them!).  

 Inflation figures for January showed a slight increase up 0.1% to 0.7% annually according to the ONS.  Economists are predicting that the Bank of England’s target rate of 2% could be passed this year as the price of consumer goods rises. 

 UK house prices rose at their highest annual rate since 2014 in December as buyers rush to take advantage of the stamp duty holiday which grants a tax exemption on the first £500,000 of residential property purchases. It is set to be extended until June after being introduced by the government in July 2020. 

 UK unemployment is now up at 5.1% for the three months to December which is the highest it has been since 2016.  The reading is arguably not as high as it could have been given the furlough scheme has helped to limit redundancies to date.  The acid test will come when support is removed and the economy begins to reopen with many businesses and unions calling for support to be extended until the economy’s recovery is established. 

EUROPE

The former head of the European Central Bank (ECB) was summoned by the Italian president to form a new government.  Mario Draghi is now leader of the new national unity government and pledged in his first speech, as Italy’s new prime minister, to combine investment of EU funds with structural reforms.  He has promised that the ambitious programme will “deliver a better and fairer country for our children and grandchildren” and pledged to “take care of those who are suffering now, those who are losing their jobs or forced to close their businesses,” he has committed to mobilise resources to fight the Covid-19 pandemic. 

 Brussels faced international criticism for threatening the Irish border arrangements between the UK and the EU as they attempted to curb vaccine exports.  The measures would give EU member states and the commission the ability to block vaccine shipments from companies that also have contracts to supply the EU.  A rather worrying turn of events given that we’re not even one month into the new Brexit world but President of the European Commission Ursula von der Leyen has promised Boris Johnson that future EU controls on vaccines will not disrupt supplies. 

 The ECB has committed to maintaining a ‘steady hand’ on stimulus measures according to minutes released this month from January’s meeting.  The governing council said that: “a temporary boost to inflation should not be mistaken for a sustained increase, which is likely to emerge only slowly”.  Such comments suggest there will be little change to policy over the coming year for the area. 

US                                                                                        

Joe Biden is getting to grips with his public borrowing and spending plans for the US economy in the hope that his administration can “build back better” from the pandemic.  The fiscal stimulus package of $1.9 trillion is huge and the whole world is watching.  With the risk of inflation and stagnation as a backdrop, it will be an experiment that requires fine balance but if the strategy works to support better future growth rates the scars may not be quite as deep. 

The first bilateral meeting with a foreign leader has taken place between the US President and Canadian Prime Minister Justin Trudeau.  The leaders referenced mutual policy priorities around climate change (to achieve zero emissions by 2050) and China (particularly in connection to the detention of two Canadians).

 

Rest in peace Captain Sir Tom Moore.

 

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