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Markets boosted over rising hopes for US economic stimulus

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Your level-headed briefing on how the coronavirus epidemic is affecting the markets, global business, our workplaces and daily lives, with expert input from our reporters and specialists across the globe.

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Equities markets were bolstered on Monday by reports that US president Donald Trump could be discharged from hospital, as well as hopes for new stimulus measures in the US. 

Nancy Pelosi, the Democratic speaker of the House, suggested the president’s coronavirus diagnosis could help break the stalemate and create the conditions for a fiscal support package or special measure for the struggling airline industry.

Mr Trump’s 2020 re-election campaign has been thrown into turmoil after several of his campaign aides, surrogates and advisers tested positive for the virus as well as the candidate himself. He was hospitalised on Friday and remained under supervision throughout the weekend.

Some White House and congressional staffers reported feeling pressured not to wear masks because their bosses either did not believe in them or thought they made them look scared or weak. 

The president sparked criticism for briefly leaving Walter Reed military hospital in an SUV to thank supporters on Sunday, a political stunt that raised questions about the coronavirus infection risk to his driver and security team.

Mr Trump’s infection has refocused attention on the president’s health, which has been the source of speculation throughout his term in office. He is the latest in a long line of US presidents to suffer ill health in office. The history of illness in presidents is largely one of intense secrecy, and occasionally flat-out lies.

Markets

Oil prices slipped below $40 a barrel to hit the lowest level since June as traders bet the recovery in a market hammered by the pandemic has run out of steam. With cases rising and demand still struggling, industry executives are increasingly arguing the recovery to pre-pandemic levels above $60 a barrel will take longer than anticipated.

Line chart of US current account balance as a % of GDP, showing how the US has run a large and persistent current account deficit

Stephen Roach at Yale University forecasts the end of the dollar’s exorbitant privilege. A crash is likely, given the collapse in US domestic saving and a gaping current account deficit. “While a Covid-related explosion in the federal government deficit is the immediate source of the problem, this was an accident waiting to happen.”

Global stocks moved higher on Monday following reports that President Trump could be discharged from hospital later in the day and hopes that US lawmakers could strike a deal on new measures to stimulate the economy. European bourses made solid gains, with the benchmark Stoxx Europe 600 up 0.7 per cent. The CAC40 in Paris and London’s FTSE 100 were among the best-performing bourses on the continent, rising around 1 per cent.

Business

Chinese ecommerce giant Alibaba plans to take a stake of up to 10 per cent in Dufry, the world’s largest operator of airport duty-free shops, as part of an emergency SFr700m ($765m) capital raising. Dufry has reeled as the pandemic has flattened its business, with airport footfall dwindling across its core European and North American markets.

Cineworld will close all its UK and US cinemas indefinitely, threatening tens of thousands of jobs, after the long-awaited next instalment in the James Bond franchise became the latest movie to be pulled by Hollywood studios. Late last week, Hollywood studio MGM postponed the release of No Time to Die, which is Daniel Craig’s final outing as James Bond and was due to begin showing in cinemas on November 12.

International delivery company DPD will have hired 20,000 new workers across Europe by the end of the year in response to the surge in demand for parcels due to the pandemic. The hiring spree, a 25 per cent increase, underlines the boost to business for groups such as Amazon, Hermes and DHL Express as they recruit thousands of extra staff to cope with soaring orders.

Global economy

The next big shift in the global economy is likely to depend on how manufacturing and non-manufacturing sectors respond to the economic shocks caused by the virus, and the possible arrival of a vaccine. Gavyn Davies, chairman of Fulcrum Asset Management, argues that markets are reflecting sectoral shifts in the world economy as services lag behind manufacturing.

The IMF has issued a rallying call to rich countries around the world to increase public investment as the best way to encourage a strong economic recovery from the pandemic. Advanced economies should not worry about debt, but take advantage of historically low borrowing costs to increase spending on infrastructure maintenance immediately, it said.

The role of digital companies in post-pandemic recovery raises important economic questions, argues Rana Foroohar, the FT’s US business columnist. It suggests a rise in intangible assets, jobless growth, pricing pressures and new valuation methods. It could also mean less inflation and the need to adapt monetary policy.

Get in touch

How is your workplace dealing with the pandemic? And what do you think business and markets — and our daily lives — will look like after lockdown? Please tell us by emailing covid@ft.com. We may publish your contribution in an upcoming newsletter. Thanks

The essentials

Test before you board is the only route back to air travel, argues FT columnist Michael Skapinker. In contrast to previous international co-operation efforts in aviation, each country today has come up with its own rules during the pandemic. “If flying is to resume, governments, regulators and the industry need to move towards a common system of assuring themselves, and passengers, that people flying are infection-free.”

Final thought

Detail of Susanna and the Elders’ (1652) by Artemisia Gentileschi
Detail of ‘Susanna and the Elders’ (1652) by Artemisia Gentileschi © Pinacoteca Nazionale Bologna

The stakes are high, as London holds its first major exhibition launch since lockdown: the UK’s first retrospective for Artemisia Gentileschi and its first retrospective of any Renaissance or Baroque woman painter. The FT’s Jackie Wullschläger argues that the risks have paid off. The artist “stunningly enlarged Baroque to convey, through riveting psychological storytelling, the experiences of that half of society which had never before been given interior emotional expression in paint”.



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Financial bubbles also lead to golden ages of productive growth

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Sir Alastair Morton had a volcanic temper. I know this because a story I wrote in the early 1990s questioning whether Eurotunnel’s shares were worth anything triggered an eruption from the company’s then boss. Calls were made, voices raised, resignations demanded. 

Thankfully, I kept my job. Eurotunnel’s equity was also soon crushed under a mountain of debt. Nevertheless, the company was refinanced and the project completed. I raised a glass to Morton’s ferocious determination on a Eurostar train to Paris a decade later.

With hindsight, Eurotunnel was a classic example of a productive bubble in miniature. Amid great euphoria about the wonders of sub-Channel travel, capital was sucked into financing a great enterprise of unknown worth.

Sadly, Eurotunnel’s earliest backers were not among its financial beneficiaries. But the infrastructure was built and, pandemics aside, it provides a wonderful service and makes a return. It was a lesson on how markets habitually guess the right direction of travel, even if they misjudge the speed and scale of value creation.

That is worth thinking about as we worry whether our overinflated markets are about to burst. Will something productive emerge from this bubble? Or will it just be a question of apportioning losses? “All productive bubbles generate a lot of waste. The question is what they leave behind,” says Bill Janeway, the veteran investor.

Fuelled by cheap money and fevered imaginations, funds have been pouring into exotic investments typical of a late-stage bull market. Many commentators have drawn comparisons between the tech bubble of 2000 and the environmental, social and governance frenzy of today. Some $347bn flowed into ESG investment funds last year and a record $490bn of ESG bonds were issued. 

Last month, Nicolai Tangen, the head of Norway’s $1.3tn sovereign wealth fund, said that investors had been right to back tech companies in the late 1990s — even if valuations went too high — just as they were right to back ESG stocks today. “What is happening in the green shift is extremely important and real,” Tangen said. “But to what extent stock prices reflect it correctly is another question.”

If the past is any guide to the future, we can hope that this proves to be a productive bubble, whatever short-term financial carnage may ensue.

In her book Technological Revolutions and Financial Capital, the economist Carlota Perez argues that financial excesses and productivity explosions are “interrelated and interdependent”. In fact, past market bubbles were often the mechanisms by which unproven technologies were funded and diffused — even if “brilliant successes and innovations” shared the stage with “great manias and outrageous swindles”.

In Perez’s reckoning, this cycle has occurred five times in the past 250 years: during the Industrial Revolution beginning in the 1770s, the steam and railway revolution in the 1820s, the electricity revolution in the 1870s, the oil, car and mass production revolution in the 1900s and the information technology revolution in the 1970s. 

Each of these revolutions was accompanied by bursts of wild financial speculation and followed by a golden age of productivity increases: the Victorian boom in Britain, the Roaring Twenties in the US, les trente glorieuses in postwar France, for example.

When I spoke with Perez, she guessed we were about halfway through our latest technological revolution, moving from a phase of narrow installation of new technologies such as artificial intelligence, electric vehicles, 3D printing and vertical farms to one of mass deployment.

Whether we will subsequently enter a golden age of productivity, however, will depend on creating new institutions to manage this technological transformation and green transition, and pursuing the right economic policies.

To achieve “smart, green, fair and global” economic growth, Perez argues the top priority should be to transform our taxation system, cutting the burden on labour and long-term investment returns, and further shifting it on to materials, transport and dirty energy.

“We need economic growth but we need to change the nature of economic growth,” she says. “We have to radically change relative cost structures to make it more expensive to do the wrong thing and cheaper to do the right thing.”

Albeit with excessive enthusiasm, financial markets have bet on a greener future and begun funding the technologies needed to bring it to life. But, just as in previous technological revolutions, politicians must now play their part in shaping a productive result.

john.thornhill@ft.com



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US tech stocks fall as government bond sell-off resumes

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A sell-off in US government bonds intensified on Wednesday, sending technology stocks sharply lower for a second straight day.

The yield on the 10-year US Treasury bond, which acts as a benchmark for global borrowing costs, climbed to nearly 1.5 per cent at one point. It later settled around 1.47 per cent, up nearly 0.08 percentage points on the day.

Treasury trading has been particularly volatile for a week now — 10-year yields briefly eclipsed 1.6 per cent last Thursday — but the rise in yields has been picking up pace since the start of the year and the moves have begun weighing heavily on US stocks.

This has been especially true for high-growth technology companies whose valuations have been underpinned by low rates. The tech-focused Nasdaq Composite index was down 2.7 per cent on Wednesday, on top of a 1.7 per cent drop the day before.

The broader S&P 500 fell by 1.3 per cent.

The US Senate has begun considering President Joe Biden’s $1.9tn stimulus package, with analysts predicting that the enormous amount of fiscal spending will boost not only economic growth but also consumer prices. The five-year break-even rate — a measure of investors’ medium-term inflation expectations — hit 2.5 per cent on Wednesday for the first time since 2008.

Inflation makes bonds less attractive by eroding the value of their income payments.

“I would expect US Treasuries to continue selling off,” said Didier Borowski, head of global views at fund manager Amundi. “There is clearly a big stimulus package coming and I expect a further US infrastructure plan to pass Congress by the end of the year.”

Mark Holman, chief executive of TwentyFour Asset Management, said he could see 10-year yields eventually trading around 1.75 per cent as the economic recovery gains traction later this year.

“It will be a very strong second half,” he said.

Line chart of Five-year break-even rate (%) showing US medium-term inflation expectations hit 13-year high

Elsewhere, the yield on 10-year UK gilts rose more than 0.09 percentage points to 0.78 per cent, propelled by expectations of a rise in government borrowing and spending following the UK Budget.

Sovereign bonds also sold off across the eurozone, with the yield on Germany’s equivalent benchmark note rising more than 0.06 percentage points to minus 0.29 per cent. This was an example of “contagion” that was not justified “by the economic fundamentals of the eurozone”, Borowski said, where the rollout of coronavirus vaccines in the eurozone has been slower than in the US and UK.

The tumult in global government bond markets partly reflects bets by some traders that the US Federal Reserve will be pushed into tightening monetary policy sooner than expected, influencing the costs of doing business for companies worldwide, although the world’s most powerful central bank has been vocal that it has no immediate plans to do so.

Lael Brainard, a Fed governor, said on Tuesday evening that the ructions in US government bond markets had “caught my eye”. In comments reported by Bloomberg she said it would take “some time” for the central bank to wind down the $120bn-plus of monthly asset purchases it has carried out since last March.

After a series of record highs for global equities as recently as last month, stocks were “priced for perfection” and “very sensitive” to interest rate expectations that determine how investors value companies’ future cash flows, said Tancredi Cordero, chief executive of investment strategy boutique Kuros Associates.

Europe’s Stoxx 600 equity index closed down 0.1 per cent, after early gains evaporated. The UK’s FTSE 100 rose 0.9 per cent, boosted by economic support measures in the Budget speech.

The mid-cap FTSE 250 index, which is more skewed towards the UK economy than the internationally focused FTSE 100, ended the session 1.2 per cent higher.

Brent crude oil prices gained 2 per cent at $64.04 a barrel.



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UK listings/Spacs: the crown duals

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City-boosting proposals are not enough to offset lack of EU financial services trade deal



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