Pushed towards Risk
- Earlier this week European leaders crossed the Rubicon and agreed an unprecedented economic programme. The EU have agreed a deal on a €750bn recovery fund to address Covid-19 damage; importantly, all raised by issuing EU common bonds for the first time. The issuance of these bonds will enhance the trading bloc’s financial autonomy from the US, furthering its potential role as a reserve currency.
- A coronavirus vaccine being developed by the University of Oxford and AstraZeneca is safe and shows signs of inducing an immune response, according to early clinical trial results published on Monday. The trial did not look at whether the vaccine prevents infection from the virus however; that question will be answered in ongoing trials. Whilst this is good news, it must be acknowledged as a small step on a long path to a vaccine.
- Yesterday the price of gold closed at $1,887 per ounce having pushed up nearly 5% over the week in dollar terms. As the rally in gold continues, it looks like it might push above $1,900 for only the second time in history. The only time it’s happened before was when intraday gold prices exceeded $1,900 twice in 2001 in response to the European crisis when investors were worried that Europe would disintegrate as a trading bloc.
Investors face a landscape in which neither government bonds nor cash offer positive returns. The former have no room to run as yields are already flirting with negative territory. Returns on the latter remains beaten down by historically low interest rates.
Meanwhile a plethora of government programmes (such as the European recovery programme mentioned above) offer strong support to the short-term troubles many companies are facing. This security suppresses some of the risk which would otherwise be associated with these assets.
This combination is driving investors to take risks they might ordinarily not in order to lock in some sort of meaningful returns. As such, corporate bonds and equities continue to push higher whilst gold offers a safe haven investment to protect against further downside risk.
As ever, looking for fairly priced, resilient businesses remains our focus. By investing in these companies, we are able to look beyond the hostile short-term environment, confident that these businesses can endure, therefore allowing us to focus on the far more prosperous long term prospects.
Quote of the Week
It’s fair to say that the Trump administration has done some serious toing and froing over the last few weeks and the message has not always been eitherconsistent or clear. However, even by their usual standards this is a memorable soundbite. The White House press secretary has revived President Trump’s calls for schools to reopen with the fantastic comment “the science shouldn’t stand in the way”. Echoing the president’s push for pupils to return to classrooms, Kayleigh McEnany said “we don’t think children should be locked up at home, with devastating consequences”. You may remember that back in April, Trump suggested injecting people with disinfectant to treat the virus. This is one man who won’t let a silly thing like science get in his way.