By Dhanum Nursigadoo of ComplyAdvantage
Since the 1980s a charging bull sculpture has made Wall Street its home. A symbol of financial optimism and prosperity. However, the bull has bolted. Thanks to Covid-19, the financial world is now facing a bear market.
The UK is about to enter the next phase of the COVID-19 pandemic. As the virus still impacts countries and economies around the world, businesses will begin to open and lockdown rules relaxed. The UK Prime Minister Boris Johnson has raised the starting gun and this is due to go off on the 4th July.
It is perhaps fitting that this ‘new normal’ will begin on the date celebrated as Independence Day in the United States. For as we have seen with the last financial crisis it is where the US leads that the rest of the world – including the UK – usually follows.
Unemployment in the USA has already affected a staggering 40 million people and the UK shows similar signs with 2.1 million. It seems to be a worldwide problem even with countries that have been praised for their handling of the pandemic in the short term. Take Singapore for example who have currently recorded 26 deaths but still experienced the biggest unemployment spike since SARS.
The monthly increase of unemployed in the UK is at its highest since records began – and worryingly this is with the furlough scheme in place. If the ‘new normal’ signals the start of pubs and businesses opening, then it also brings with it the end of the unprecedented government support of the last few months.
It’s because of this type of government support that means the fallout will be very different from what happened after the 2007 financial crisis. Governments have already used up a great deal of their cash reserves when propping up the economy during sweeping lockdown measures. This potentially means there will be no bailouts and maybe there isn’t a single business that is too big to fail now.
But what part can financial institutions play in the bear market?
So far, financial institutions have already been working to prevent companies from going under and to make sure the economy is supported. The distribution of government funds has been working through schemes such as the UK’s Coronavirus Business Interruption Loan Scheme (CBIL) which has been specifically set up for small and medium-sized businesses and makes up to £5 million worth of loans and finance available.
How financial institutions have already acted during the tougher lockdown restrictions will also determine who is trusted going forward. Through CBIL financial institutions have been able to build important and key relationships with both old and new clients. Those who have been able to act quickly – and crucially not provide false hope to customers at a time of heightened vulnerability – will have earnt a lot of goodwill and loyalty. We are already seeing in the UK that businesses are potential targets for public ire depending how they acted during the initial stages of the pandemic – and financial institutions are not immune from this behavior. It may be that those financial institutions that increased lending and reduced interest rates to keep cash flowing will benefit.
This next phase will see people and businesses try and operate in a world where physical distance is key. Therefore, making interactions and processes effective in a socially distant way will hugely benefit financial institutions. Some of the groundwork has already been done with measures such as ‘electronic Know Your Client (eKYC)’ as the move to digitalization continues. Now to be able to verify someone’s identity electronically is not just about being as secure as possible to combat fraud, but also about operating as safely as possible in a world in which working remotely is the accepted way to behave.
If this is the way that the bear market will differ from what we’ve seen before, there is still one trend that is most likely to be repeated again. Following the global financial crisis, we saw financial institutions being hit by regulation after regulation – over ten years later it can be argued that this is still happening. It is highly likely that the regulatory burden will continue to increase.
There is currently a consensus from looking at the USA and UK economies that this recession is likely to have a slow recovery time. Therefore the importance of compliance functions that are capable of handling new regulations cannot be overstated. This will benefit those institutions who have treated compliance not just as a burden, but something that enhances and strengthens businesses.
Financial institutions have shown over the last few months how they can keep the economy going. As we settle into the bear market it is imperative that they adapt to the situation, whether that’s building on existing processes such as eKYC or developing new partnerships out of unprecedented schemes like CBIL.
After all, it is this that will keep the economy going during a bear market, and be remembered when the bull charges again.
Wall Street bounce, upbeat earnings lift European stocks
By Amal S and Sruthi Shankar
(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.
The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.
All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.
Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.
Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.
Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.
The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.
“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.
The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.
“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.
Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.
Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.
Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.
Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.
(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)
Miners lead FTSE 100 higher on earnings cheer
By Shivani Kumaresan
(Reuters) – UK’s FTSE 100 rose on Wednesday as miners gained after a strong production forecast from BHP Group, while encouraging updates from luxury brand Burberry and education group Pearson drove optimism about the earnings season.
BHP Group Ltd climbed 2.8% after it forecast record iron ore production for fiscal 2021, helped by high prices for the commodity. Other miners Rio Tinto, Anglo American and Glencore rose more than 2%.
Global markets rallied in anticipation of more fiscal spending as Joe Biden prepared to take charge as the 46th U.S. president.
“There is a view in the markets that more spending is in the pipeline, after all, Mr Biden will want to start his presidency on a positive note,” said David Madden, market analyst at CMC Markets UK.
The FTSE 100 index rose 0.4% and the domestically focussed FTSE 250 index added 1.4%.
The FTSE 100 has recorded consistent monthly gains since November after the sealing of a Brexit trade deal and hopes of a vaccine-led economic recovery, but has recently lost steam as tighter business restrictions sparked fears of a slow rebound.
Burberry rose 3.9% as it stuck to its full-year goals and said higher full-price sales would boost annual margins and Asian demand remained strong.
Global education group Pearson jumped 8.6% after its global online sales grew 18% in 2020, helped by strong enrolments in virtual schools.
WH Smith Plc surged 10.4% to the top of the FTSE 250 index as its trading during Christmas was ahead of its expectations.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V, William Maclean)
What we can expect from currencies and markets in 2021
By Jeremy Thomson-Cook, Chief Economist at money management specialist Equals Money, part of the Equals Group.
2020 was a year that changed almost every aspect of our lives, and currency markets across the world reacted with volatility. Complacency, panic, and isolation have influenced activity over the last 12 months and most recently, a semblance of hope has been seen as vaccines offer the first glimpse of a ‘way out’.
While 2021 will hopefully see us on the road to recovery, we’re certain to be dealing with the longer-term economic effects of the pandemic for years to come, while also navigating a post-Brexit outlook. So, what can we expect from currencies and markets in 2021?
A focus on recovery
Once the impact of mass-vaccination starts to be seen across the world, we expect to see a huge focus on recovery this year.
Investors are expected to move away from considering the US dollar and wider developed markets as the best place for their money, with an increased interest in emerging markets. Commodity prices are likely to remain high as demand recovers and the global supply chain gains pace due to growing confidence from consumers to spend their cash.
Successful logistics will play a pivotal role on the road to recovery, with the ability of governments to both reliably and speedily vaccinate the population while driving the global economy from a trade point of view, essential for success.
All this is underpinned by the assumption that interest rates will remaining at ultra-low levels throughout this year, and in certain cases, longer still.
When it comes to sector-specific recovery, the travel, airline, and leisure industries are expected to make a strong comeback when restrictions ease as consumers look to make up for lost time.
By contrast, commercial property and real estate are likely to face challenges as businesses revaluate how they use office space after nearly a year of successful remote working. This struggle will also be reflected by the increasing amount of empty retail space on British highstreets after the sector, and some of Britain’s most established brands, were hit hard in 2020.
What will we see from currencies across the globe?
The pound is reacting to a UK economy still very much in the grips of a pandemic, with strict lockdown measures likely to be in place until at least March. Add to that a new relationship with the European Union, and we’re likely to see the pound underperform in 2021, particularly against the euro.
Politics is likely to have less sway over sterling in 2021, with the exception of the upcoming elections in Scotland which are likely to raise the chances of another Sottish referendum on independence.
Despite the expectation that the pound will have a modest year, we do expect to see it move higher against the US dollar in the coming months.
All signs point to a strong start for the euro, and we expect it will continue the strength it showed at the end of 2020 for the months to come. Its counterparts in Scandinavia (NOK, SEK) and in Central and Eastern Europe (PLN, HUF) may even outperform the single currency as the Eurozone recovery outpaces the US and UK’s.
Markets are pleased that the Eurozone has managed to come together during a time of crisis and offer businesses and consumers both fiscal and monetary policy support. The political agenda looks a lot quieter for 2021, and this lack of political pressure coupled with a central bank that has shown its strength through the Pandemic Emergency Purchase Program, means sovereign risk is very low.
The US dollar is likely to remain weak as investors who have bought into the dollar during Trump’s tenure in the White House react to the transition to a Biden Administration – a change that is likely to normalise global trade and expand spending.
US businesses have struggled with international relations under the watch of a Trump administration and a calmer stewardship of trade should help to boost corporate profits in the coming months, allowing for further USD depreciation.
If the UK, Asia or the Eurozone are able to move forward with their pandemic recovery faster than the US, we expect the dollar to lag against both GBP and EUR, as well as other emerging currencies – the Chinese yuan, Russian ruble and Indonesian rupiah – in 2021.
The Japanese yen has acted as a safe haven from negative investment sentiment throughout the Covid-19 pandemic, and arguably long before that, pushing higher against other currencies in 2020.
While the yen would typically be sold off by investors in favour of more attractive investments, the overall outlook becomes more positive as it continues to show strength as we enter 2021. This could be down to the strange markets that we are currently navigating; vaccine joy tempered by very real near-term pandemic problems. Investors may also be positioning themselves for a wider retreat in the US dollar (USD).
Whilst the Japanese yen may enjoy some strength against the USD in the coming year and remains one to watch, we expect it to slip on a broader basis.
The Australian dollar has acted as a poster child for the recovery in risk assets since the early days of the pandemic, and its likely to remain ahead of its counterparts for the early part of the year.
Australia’s handling of the pandemic to date gives it an advantage over the likes of the UK and US, and as it enters the summer months with a vaccine rollout all but underway, the outlook is positive.
If market minds are focused on a recovery then we will be looking for a higher AUD, and it is not out of the realms of possibility that it could outperform the majority of the G10.
If 2020 taught us anything, it’s that nothing’s set in stone and as we start the new year in another lockdown, it looks like that’s set to continue for 2021. Either way, we’ll see the uncertainty of the world we live in continue to be reflected in the market and currency activity across the globe.
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