Weekly Market Insight

Latest Economic & Market Update 14th May 2020

14th May 2020

Good afternoon, it is 14th May 2020 and here is your economic and market update from BlackBee.

Today we are going to focus on:

  • US stocks hit three week low.
  • The debate on refunds in the tourism industry.
  • Jerome Powell warns of long term economic damage without extra stimulus.

Markets in the US closed lower for the second day in a row as investors came to grips with possible long term damage to the economy. The Dow Jones Industrial Average was down -2.17% and the S&P500 was down -1.75% for the day, as US stocks fell to a three week low. US airline stocks also crashed as the International Air Transport Association warned that the demand for flights will not return to levels forecasted before the crisis for at least 5 years. The index for major US carriers on the S&P500 has fallen by 66% this year. This marks the worst ever drop of any industry on the S&P500.
 
The tourism industry has been one of the biggest hit industries from the crisis. Usually, under EU regulations, customers are entitled to refunds when their flights have been cancelled. However, the airline industry is strapped for cash and has been letting a huge number of employees go in recent weeks as flights are grounded. Twelve countries, including Ireland, are lobbying for airlines to have the ability to force customers to take vouchers instead as a refund. This leaves the consumer at risk to the issuer going bankrupt and the time frame of when travel will return must also be considered. These concerns will need to be addressed if the voucher is enforced. Economic hardship is prevalent across Europe and many will be seeking a full refund as they need the funds. Therefore the situation is ultimately a trade-off between protecting the airline industry or returning funds to people who may need it. The tourism industry is set for a long road to recovery because even when travel eventually returns, social distancing measures is likely restrict the number of people able to travel.

The chair of the Federal Reserve, Jerome Powell has warned that additional economic stimulus may be required to prevent long term damage to the economy. He stressed that deep and long recessions result in an extended period of low productivity growth. The comments reinstate the belief that it will be a longer recovery than expected, despite the swift and large response from the FED and Fiscal Authorities. He also stated that they were not considering negative interest rates, a decision which President Trump doesn’t agree with. Some argue that negative interest rates would be of benefit to stimulate growth by influencing banks to lend more, as they would be subject to charges by leaving cash on deposit. However, as we have seen in Europe’s slow recovery from the 2009 financial crisis, and considering there is an expected slow recovery for this crisis, bank margins may be eaten into, an outcome that weakened the financial strength of banks across Europe.

Best & Worst Performers of Large Cap Stocks on Wednesday
Click the image to enlarge

Global Market Update
(as at close of markets 13/05/2020)