Graeme Wearden 

IMF urges governments to maintain support, as Covid-19 restrictions worry markets – as it happened

International Monetary Fund says it’s too early to end government support scheme, as pandemic drives up to 90m people into extreme poverty
  
  

Empty tables near Carnaby Street yesterday.
Empty tables near Carnaby Street in London yesterday. Photograph: Dan Kitwood/Getty Images

Closing post

And finally... Britain’s FTSE 100 has closed at its lowest point in almost two weeks.

The blue-chip index ended the day at 5935, down 34 points or 0.6%.

But, this slide was partly due to a rally in the pound today, which pulled down the share price of multinationals with large overseas earnings.

Sterling has gained almost a cent against the US dollar to $1.3022. It’s also up around half a eurocent at €1.107.

This followed reports that the UK was prepared to extend Brexit negotiations beyond this week’s European Summit. Boris Johnson had set October 15th (tomorrow) as the deadline for a deal, but there have been signals this week that negotiators are making progress, so the UK may not walk away.

Fawad Razaqzada of ThinkMarkets explains:

As sterling has become heavily headline-driven on Brexit-related headlines, it was hardly surprising to see the GBP/USD and other pound crosses turn positive earlier, despite growing concerns about the economic impact of the second wave of the coronavirus.

Bloomberg reported that the UK has signalled it won’t walk away from EU trade talks immediately. The Telegraph’s James Crisp said in a tweet that “David Frost will tell Boris Johnson that deal is still possible when he briefs PM on Brexit talks.”

Accordingly, the PM will delay a decision on whether to quit the Brexit trade negotiations until after the European Council summit ends on Friday, said the Telegraph.

We’ll find out more tomorrow! Here are today’s main stories:

Goodnight. GW

Today was a historic one for China’s equity markets -- the combined value of all the stocks listed on the Chinese bourses hit $10tn for the first time.

My colleague Richard Partington explains:

The total value of all company shares listed on the Shanghai and Shenzen markets rallied to hit $10.08tn (£7.7bn) on Wednesday, according to figures compiled by Bloomberg.

The rebound comes as the Chinese economy recovers steadily from a record drop in output earlier this year when Covid-19 first spread, driven by stimulus measures unleashed by Beijing to cushion the economic fallout.

The recovery in shares has now lifted the market capitalisation of Chinese equities higher than the previous $10.05tn peak reached in June 2015, just before regulators imposed restrictions on risky trading practices which led to a crash in share prices...

More here:

Back in the markets, online food ordering business Just Eat has now jumped 6% to a record high around £92.72.

They’ve now gained a third of their value this year, lifted by strong demand for takeaways during the lockdown.

This morning’s results, showing a 43% surge in UK sales in the last year, has cheered investors.

Back in 2017, Just Eat was allowed to takeover rival Hungry House, and in April it merged with Holland’s Takeaway.com - putting it in a prime position to profit from the pandemic.

Ruth Griffin, retail director at legal firm Gowling WLG, explains:

“The Just Eat business model has undergone a revolution through assimilating the most regularly used brands to close a long awaited gap in the takeaway delivery market.

Competition remains rampant in this space though, which means Just Eat must continue to grow, innovate and foster good relations with employees, business customers and consumers, if this performance is to be maintained.

Here’s more reaction to the IMF’s latest fiscal advice:

Nadia Daar, the head of Oxfam International’s Washington DC office, is concerned that the IMF’s concerns about inequality and resisting austerity aren’t been mirrored in its work on the ground:

On Monday, Oxfam warned that most of the loans granted by the IMF since March to emerging economies push for “belt-tightening” once the crisis is over.

That could result in “deep cuts to public healthcare systems and pension schemes, wage freezes and cuts for public sector workers such as doctors, nurses and teachers, and unemployment benefits, like sick pay,” the charity warned.

There’s a cautious start to trading in New York today.

The Dow Jones industrial average has dipped by 27 points, or 0.1%, to 28,652, while the tech-focused Nasdaq has lost 0.3%.

Industrial and energy stocks are up, but healthcare and consumer-cyclicals are down.

Rising cases in the US, and Europe, is weighing on investors’ minds - along with jitters about the US elections next month.

CNN reported yesterday that America was now entering the much-feared ‘fall Covid-19 surge’

“We went down to the lowest point lately in early September, around 30,000-35,000 new cases a day. Now we’re back up to (about) 50,000 new cases a day. And it’s going to continue to rise,” Dr. Peter Hotez, dean of the National School of Tropical Medicine at Baylor College of Medicine, said Tuesday.”

This is the fall/winter surge that everyone was worried about. And now it’s happening. And it’s happening especially in the northern Midwest, and the Northern states are getting hit very hard -- Wisconsin, Montana, the Dakotas. But it’s going to be nationally soon enough.”

IMF: austerity is not inevitable

The IMF has also rubbished the idea that governments should be imposing austerity soon, to pay the cost of Covid-19.

Instead, the Fund argues that austerity is not inevitable, and that countries who can borrow freely can stabilise debt without fiscal adjustment.

That’s because borrowing cost are at such record lows - meaning record debt levels are cheaper to service (the UK, for example, can borrow at around 0.2% per year for a decade).

The Financial Times has the details:

By 2025, most advanced countries would “have a higher cyclically-adjusted primary deficit, but that is to a very large extent compensated for by lower interest payments”, Mr Gaspar said.

As a result, there is no need for budgetary consolidation in countries able to borrow freely from financial markets, he added.

“The [public debt] ratio in our projections stabilises and even declines slightly towards the end of our projections which shows that Covid-19 is a one-off jump up in debt and with low interest rates, the debt dynamics stabilise.”

The FT’s Chris Giles says the IMF’s tone is quite different than a decade ago, when it was pushing for ‘retrenchment’ (ie austerity, through tax rises and spending cuts).

An important change, as finance ministers such as Rishi Sunak try to assess how much more support to provide to their economies to prevent surging unemployment.

IMF: Covid-19 could push 90m into extreme poverty

Grimly, the IMF estimates that the pandemic could push between 80 million and 90 million more people into extreme poverty.

Today’s fiscal monitor says Covid-19 is driving down living standards, and pushing up malnutrition:

COVID-19 has confronted policymakers with painful and urgent trade-offs. Living standards will be falling in most of the world. We estimate that the number of people in extreme poverty will increase by 80 to 90 million.

The risk of malnutrition is on the rise. Access to health and education are problematic for important segments of the population. The international community must act with debt relief, access to grants and concessional financing— now and going forward—to help the poorest countries tackle these urgent and painful trade-offs.

That increase will be largely concentrated in emerging market and developing economies in sub-Saharan Africa and South Asia, the Fund says. It could have been even worse - up to 110m - without various assistance measures.

But the impact will be broader too -- income inequality within countries is expected to increase as the pandemic affects low-income individuals disproportionately.

The IMF also warns that repairing the damage caused by Covid-19 will be a long-term challenges.

Today’s fiscal monitor explains:

Once the pandemic is under control, governments will need to foster the recovery while addressing the legacies of the crisis—including the large fiscal deficits and high public debt levels.

1) Countries with fiscal space and major scarring from the crisis, such as large long-term unemployment, should provide temporary fiscal stimulus while planning for an adjustment over the medium term.

2) Countries with high debt levels and less access to financing will also need to adjust over the medium term, striving to protect public investment and transfers to lower-income households.

IMF: Too early for governments to end Covid-19 support

Over in Washington, the International Monetary Fund is urging governments not to withdraw their Covid-19 economic support packages too quickly.

The IMF’s new fiscal monitor outlines that global debt levels have hit record levels this year, at nearly 100% of global output.

But despite this debt burden, the Fund insists that governments should ensure that fiscal support is not withdrawn too rapidly.

Vitor Gaspar, the IMF’s director of fiscal affairs, says:

The COVID-19 crisis has devastated people’s lives, jobs, and businesses. Governments have taken forceful measures to cushion the blow, totaling a staggering $12 trillion globally. These lifelines have saved lives and livelihoods. But they are costly and, together with sharp falls in tax revenues owing to the recession, they have pushed global public debt to an all-time high of close to 100 percent of GDP.

With many workers still unemployed, small businesses struggling, and 80‑90 million people likely to fall into extreme poverty in 2020 as a result of the pandemic—even after additional social assistance—it is too early for governments to remove the exceptional support. Yet many countries will need to do more with less, given increasingly tight budget constraints.

Gaspar adds that governments should also recognise that Covid-19 has caused some permanent changes to economies, and jobs markets.

As economies tentatively reopen, but uncertainty about the course of the pandemic remains, governments should ensure that fiscal support is not withdrawn too rapidly.

However, it should become more selective and avoid standing in the way of necessary sectoral reallocations as activity resumes.

The IMF have also produced this chart, showing how advanced economies found it much easier to ease fiscal policy, through increased spending and more support for companies.

European stock markets are mostly in the red after a fairly underwhelming morning.

The FTSE 100 has lost its earlier zip, now down 0.25% as the pound strengthens slightly on hopes that a Brexit free trade deal could be agreed.

The usual themes are dominating investors minds -- a world health crisis, the global downturn, and the race for the White House.

As Kit Juckes of Société Générale told clients:

US fiscal talks have stalled. An antibody and a vaccine trial in the US have paused to investigate illness among trialists. UK PM Johnson’s self-imposed deadline for making progress on Brexit talks is fast approaching (but who really thinks he will just walk away?). And virus trends, particularly in Europe, are alarming, but in the UK, Mr Johnson is caught between those who think the country needs a more forceful lockdown and those who think current proposals are already too stringent.

These themes feel as old as the hills and the market would much rather forget about them, and wake up to find a world post-election, post-virus, post-Brexit. Fat chance of that happening! But if we did stumble on such a world, we would find that it was one with a lot debt, and a lot of spare capacity as a result of the pandemic...

Goldman Sachs profits surge

Just in: Wall Street bank Goldman Sachs has posted a surge in profits.

Earnings at Goldman Sachs jumped by 94% in the last quarter, to $3.5bn from $1.8bn a year ago.

Although business slowed in July-September compared with April-June, the bank’s revenue were still nearly 30% higher than in Q3 2019.

It says:

Net revenues were $10.78 billion for the third quarter of 2020, 30% higher than the third quarter of 2019 and 19% lower than the second quarter of 2020.

The increase compared with the third quarter of 2019 reflected higher net revenues across all segments, including significant increases in Asset Management and Global Markets. The operating environment continued to recover during the third quarter of 2020 from the impact of the COVID-19 pandemic earlier in the year as global economic activity significantly rebounded following a sharp decrease in the second quarter, market volatility declined modestly, and monetary and fiscal policy remained accommodative.

As a result, global equity prices increased and credit spreads tightened compared with the end of the second quarter of 2020.

Despite the worst recession in decades, the number of UK companies going into administration was near a historic low in the last three months.

Accountancy firm KPMG has calculated that 246 firms went into administration in the third quarter of 2020, the lowest level since the fourth quarter of 2015.

This is 10% lower than in April-June, and nearly 40% less than a year ago.

That suggests that the government’s unprecedented support packages have kept companies afloat. That includes the furlough scheme, business rate relief, protection for tenants, and borrowing programmes for large, medium and small firms.

Blair Nimmo, head of restructuring for KPMG in the UK, says this help has been a “vital lifeline” for businesses, but that lifeline could be snatched away soon....

“The question remains....whether the can is simply being kicked down the road. We know that as the support schemes start to unwind, and the repayment of loans, tax arrears and rent starts to kick in, cash flow is going to come under significant pressure once more.

As it stands, the moratorium on lease forfeiture ends on 31 December, so it could be a very difficult start to the new year for those who have delayed rent payments thus far.”

As well as Covid-19, global policymakers are also wrestling with the climate emergency.

And this morning, the head of the European Central Bank suggested it could potentially adjust its corporate bond-buying stimulus programme.

It currently doesn’t consider whether a company is helping resolve the climate crisis, or making it worse, when buying debt as part of its efforts to protect the economy. But could that change?...

Reuters has the details:

The European Central Bank will review a key rule forcing it to buy corporate bonds in proportion of their outstanding amounts in light of the market’s “failure” to reflect risks related to climate change, ECB President Christine Lagarde said on Wednesday.

“In the face of what I call the market’s failures, (there) is also a question we have to ask ourselves as to whether market neutrality should be the actual principle to drive our... asset purchases programme,” Lagarde told a United Nations event.

“I’m not passing judgement on the fact that it should no longer be so, but it warrants the question and this is something that we are going to do as part of our strategy review.”

Sam Miley, economist at the Centre for Economics and Business Research, warns that eurozone factory output could start falling again soon (having only risen modestly in August).

Miley says:

“The outlook for industrial production remains fragile heading into the winter months. Given their dependence on wider economic conditions, the recovery of the eurozone’s industrial sectors could be significantly hampered by the recent onset of a second wave of coronavirus infections and reimplementation of restriction measures.

As such, we will likely see some months of declining industrial output this winter or, at the very least, a further slowdown in the rate of monthly growth.”

Eurozone factory recovery slows

The recovery in Europe’s factory sector slowed dramatically in August.

Statistics body Eurostat reports that industrial production across the eurozone rose by 0.7% in August compared with July.

That left production 7.2% lower than a year ago, highlighting the economic damage caused by the pandemic.

Demand for capital goods used to produce other goods and services (such as machinery, equipment and vehicles) actually fell in August, indicating caution about the economic outlook.

However, durable consumer goods production jumped (that would include electronics, kitchen appliances, and furniture)

Eurostat explains:

In the euro area in August 2020, compared with July 2020, production of durable consumer goods rose by 6.8%, intermediate goods by 3.1% and energy by 2.3%, while production of both capital goods and non-durable consumer goods fell by 1.6%.

Germany recorded a 11.2% year-on-year drop in production in August, with France down 7.3% compared with August 2019.

Sky News are reporting that a partial rescue deal for UK restaurant chain Gourmet Burger Kitchen (GBK) is close.

Under the plan, they say, tycoon Ranjit Boparan would take on 35 of GBK’s outlets, saving around 650 jobs.

But, that would still mean hundreds more jobs lost, as GBK has over 60 sites in the UK.

Sky’s business editor Mark Kleinman explains:

Boparan Restaurants is understood to have seen off competition from the new owners of GBK’s rival burger chain, Byron, to clinch a deal.

The transaction will be the latest in a swathe of deals which have reshaped Britain’s casual dining industry since the start of the coronavirus crisis.

GBK’s current owner, South Africa-based Famous Brands, had indicated that it would not provide further funding to support the UK operation, which before the pandemic operated from 62 outlets and employed nearly 1300 people.

Here’s the full story.

Boparan Restaurant Group has had a busy pandemic. Back in May they bought the Carluccio’s brand and 31 restaurants in a deal that rescued more than 800 jobs, but saw another 1,000 jobs lost.

Here’s our news story on ASOS’s profits quadrupling in the lockdown:

Updated

IEA: Second wave of covid-19 will hit oil demand

The International Energy Agency has warned that demand for oil is slowing as Covid-19 infections rise.

In its latest monthly report, the IEA warns that the recent increase in cases threatens to stall the recovery in crude demand:

The trajectory for Covid-19 infections is strongly upwards in many countries and governments are tightening restrictions on the movements of their citizens. This surely raises doubts about the robustness of the anticipated economic recovery and thus the prospects for oil demand growth.

This means that it could take until 2023 for prices to return to $50 per barrel, it adds:

The longer term offers little encouragement for the producers; the curve shows prices not reaching $50/bbl until 2023. Truly, those wishing to bring about a tighter oil market are looking at a moving target.

Brent crude began 2020 at around $65 per barrel, but is currently changing hands at just $42 - having briefly slumped below $20 back in April.

ASOS: 20-somethings face economic disruption

Online fashion firm ASOS is also profiting from the pandemic, with earnings quadrupling in the last year.

It made £142m in pre-tax profits in the 12 months to 31 August, up from £33m a year before.

Customers flocked to its site after high street clothes stores closed during the lockdown.

But ASOS’s shares are down 6%, as it warned that its target market of younger consumers face disrupted “economic prospects and lifestyles”.

In other words, 20-somethings have less opportunity for social engagements, and are also in the front line of Covid-19 job cuts.

Nick Beighton, CEO, sounds cautious, saying:

I am pleased by the improvements we have made this year but there is still more for us to do to continue our progress.

Whilst life for our 20-something customers is unlikely to return to normal for quite some time, ASOS will continue to engage, respond and adapt as one of the few truly global leaders in online fashion retail.”

Updated

Several UK companies have reported that they’ve benefitted from the pandemic, though.

Distribution and outsourcing firm Bunzl posted an 8% surge in underlying sales, due to “continued growth in the sale of Covid-19 related products, such as masks, sanitisers, gloves and disinfectants”. Its shares are up over 5% this morning....

...as are Just Eat, the takeaway operator, after it posted a 46% leap in orders in the last quarter and predicted a busy winter, saying:

Order growth accelerated compared with the prior quarter, leading to a widening gap to competition in key countries, including the UK and Canada. Australia was the fastest-growing country, delivering market share gains with triple-digit order growth in the quarter.

The Europe-wide Stoxx 600 index has dipped this morning too, down 0.2%.

The Italian FTSE MIB is bucking the trend, though, up 0.3% after its government imposed new restrictions - but insisted it didn’t want a nationwide lockdown.

The curbs came after Italy’s daily Covid-19 cases hit their highest since March.

Reuters has the details:

Italian Prime Minister Giuseppe Conte on Tuesday imposed new restrictions on gatherings, restaurants, sports and school activities in an attempt to slow a surge in novel coronavirus infections.

The latest steps marked the second time in a week that the government has toughened its measures, though overall they remain less severe than those in other European countries such as Britain and Spain, where infection rates are far higher.

“We must avoid plunging the country into a general lockdown, the economy has started to move fast again,” Conte told a news conference.

Shares in travel and hospitality companies are falling in early trading on the London stock market.

Jet engine maker Rolls-Royce is the top faller on the FTSE 100, down 4.5%, with British Airways parent company IAG losing 4%.

Intercontinental Hotels has lost 2.2%, with Premier Inns owner Whitbread off 1.8%.

Among smaller companies, cinema chain Cineworld has lost 4.6% -- it was forced to temporarily close its UK and US sites last week.

Stephen Innes, chief global markets strategist at axi, says the “much-dreaded” autumn/winter coronavirus surge is threatening the recovery.

The tail risk,, is how lawmakers deal with this surge, and the way consumers interact remains the wild card. While a return to draconian confinement measures is unlikely, the most prominent threat to the economic recovery is fear of the virus, not necessarily the soft lockdowns or social gathering restrictions.

It is fear that could keep people hunkered down in their apartments until the curve flattens or the vaccine is available. And It could sound a significant downbeat to the economy.

Covid-19 jitters knocked Asia-Pacific markets into the red today.

All the major indices slipped, with China’s CSI 300 losing 0.6%.

Jeffrey Halley, senior market analyst at OANDA explains:

Johnson and Johnson delivered a reality check to markets, after temporarily halting clinical trials of its Covid-19 vaccine. The emphasis is on temporary, though, and trials will more than likely resume quickly.

It does, however, highlight the realities of vaccine development, even in accelerated Covid-19 environment. Again, the pessimism will most likely be short-lived and has as much to do with extended short-term positioning, then a sea change in the race to develop a Covid-19 vaccine.

Introduction: Covid-19 concerns weigh on markets

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Covid-19 fears are weighing on the financial markets again today, as rising infections put governments under pressure to consider fresh, tougher restrictions to combat the pandemic.

Overnight, the number of infections worldwide has passed 38 million, with cases still rising sharply. In France, president Emmanuel Macron, is expected to make a significant announcement about additional national lockdown measures later today.

Yesterday, the Netherlands government ordered a partial lockdown after seeing cases surge, with PM Mark Rutte warning “That hurts, but it’s the only way.”

Rutte’s plan includes the closure of bars and restaurants, and limit on the size of social gatherings.

We’re also expecting Northern Ireland to announce wide-ranging new Covid-19 restrictions to try to contain exploding rates of infection.

The measures are likely to include the closure of many businesses and schools and fresh curbs on gatherings over several weeks, amounting to a partial lockdown.

In the UK, the new three-tier system that will put Liverpool (for starters...) into tight restrictions begins today... just as the whole issue polarises Westminster.

The opposition Labour Party is pushing for a two-week ‘circuit-breaker’ lockdown to slow the virus, while backbench Conservative MPs are threatening to rebel against the existing plans including the 10pm curfew.

The markets are also losing faith in hopes of a swift medical solution to the crisis. Overnight, US pharmaceuticals firm Eli Lilly and Co paused clinical trials of its COVID-19 antibody treatment due to a safety concern.

Earlier in the week, Johnson & Johnson put its Covid vaccine trial on hold, over a participant’s ‘unexplained illness’.

Such delays are standard practice in a medical trial -- which is why it normally takes many years to bring vaccines to market.

But it’s a wake-up call to any investors who breezily thought the worst of the crisis might be behind us.

As Fiona Cincotta, analyst at Gain Capital, puts it:

On Tuesday Johnson & Johnson announced that it as pausing its covid vaccine candidate vaccine trial owing to a participants’ unexplained illness. Eli Lilly & Co announced later on Tuesday that it too is pausing its clinical trial of its covid antibody treatment on safety concerns, sending US stocks sharply lower.

Whilst it is common to see pauses in vaccine trials, this boils down to the fact that at best it could take longer to get a vaccine rolled out and at worst the trials will be shelved. Either way you look at it, its not good news for risk sentiment in the markets.

Cincotta adds that the recovery remains ‘very fragile’....

Let’s not forget that we are only in Autumn, meaning that this could be a very long winter as governments struggle to get control of the spread of the virus. These measures could quickly derail the already very fragile economic recovery.

The agenda

  • 9am BST: IEA monthly Oil Market Report
  • 9am BST: ECB president United Nations Environment Programme Finance Initiative
  • 10am BST: Eurozone industrial production for August
  • 1pm BST: IMF releases its Fiscal Monitor
  • 2pm BST: Bank of England chief economist Andy Haldane speaks at the Engaging Business Summit Autumn Lecture
 

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