29 September 2020
Stockmarkets globally ended the week with solid rallies, following a roller-coaster journey which appears to have marked the end of a month-long decline in US stocks. The US S&P 500 stockmarket index, the world’s largest by value, bottomed 9% down from its peak, only 1% shy of a formal “correction”. European stockmarket indices fared better than the US for a change, falling by two thirds that amount, and some Asian indices fell by even less. Notably, the Nikkei 225 fell only 1.5% over the same period and it’s hard to avoid the conclusion that investors do not see the same risks in Asia, perhaps because the pandemic there is, relatively speaking, under control.
The near-correction went largely unnoticed by several other asset classes. Global government bond yields were remarkably stable – indeed, price volatility in the US government bond market fell to an all-time low. This is just as well, with government bond issuance currently paying for the pandemic relief programmes that underpin the global economy. Shorter-term bonds mostly rose in value, indicating that expectations for further stimulus increased in response to the resurgence of the coronavirus. Investors now expect additional rate cuts in Australia, New Zealand and the UK (the latter two into negative territory) as well as a further reduction in the European Central Bank’s deposit rate. The US dollar, usually a safe haven in times of distress, rallied somewhat but is still well below its summer highs. Precious metals reacted badly, with gold and silver prices falling 10% and 20% respectively, suggesting that speculation has played a large part in their recent performance.
Business activity surveys in Europe contributed to investors’ nervousness, with alarming declines in activity in the service sector (which represents about two thirds of most developed-country economies). Services are now clearly suffering from the sustained return of the virus and the associated reimposition of restrictions. As a result, the European economic rebound, which was already fading, is now definitively on hold. Things are worse in the US, where the absence of a renewal of the stimulus package threatens to put the recovery into reverse gear, and economic expectations for the fourth calendar quarter are being slashed.
So why have stockmarkets bounced? One argument is that victory for Biden in the presidential election (which is, now, the favoured scenario amongst pollsters) would be good for equity investors because it would lead to a larger stimulus programme. More broadly, the robust post-pandemic recovery in most equity markets implies that investors have complete faith in the ability of central banks and governments to bail out the economy or, more precisely, to preserve the economic environment as it relates to corporations. Common sense suggests, however, that those who benefit most from the pandemic will be required to pay the most in future taxes. Fortunately, an entire school of thought has developed within the economics profession to rebut the idea that the bail-outs even have to be paid for. Known as “Modern Monetary Theory”, it argues that, with central banks able to buy any amount of government debt and keep interest rates close to zero, the issuance of government debt entails no actual cost to the government. As long as inflation can be controlled, that is. To be fair, this has largely been the case since the Credit Crunch but, as has been pointed out, if governments can raise any amount of debt to fund any spending, why do we pay taxes at all?
Tesla shares fell by as much as 17%, before recovering somewhat, after Elon Musk tempered expectations for the company’s long-awaited and much-hyped “battery day”, tweeting the batteries wouldn’t be in wide production before 2022. In other tweets, Musk warned of the “extreme difficulty” of scaling up production of new technology, and that the company expects there to be significant shortages of battery cells in 2022 and beyond unless it ramps up output of its own.
Advisers to the data-mining company Palantir Technologies, which is planning to go public on September 30th, have told investors to expect a valuation of almost $22 billion. This is far beyond a recent, independent estimate of $9 billion. Palantir has never been profitable, and lost $580 million in 2019. The company is going public via a direct listing, an alternative to a traditional initial public offering in which existing investors simply sell their shares on the market when trading begins. In both of the only major direct listings to have been held previously (Spotify Technology and Slack Technologies), the prices at the opening bell substantially exceeded expectations.
French conglomerate LVMH Moet Hennessy Louis Vuitton SE has counter-sued US jeweler Tiffany & Co. over their potential merger. Earlier this month Tiffany filed a lawsuit against LVMH after it said it was backing out the $16 billion acquisition. LVMH's counter lawsuit says Tiffany has suffered a material adverse change to its business as a result of the pandemic, triggering a standard provision in merger agreements that allows the buyer to walk away. LVMH's complaint says "Tiffany is particularly ill-suited for the challenges ahead" and "is a mismanaged business that over the first half of 2020 hemorrhaged cash for the first time in a quarter century, with no end to its problems in sight". Tiffany declined to comment.
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