Friday, 26th of June 2020
“Complacency is a state of mind that exists only in retrospective: it has to be shattered before being ascertained.”
– Vladimir Nabokov
Equity markets pushed higher through much of this week, with the notable exception of Wednesday’s session when fears of a second wave of infections in the US (and, to a lesser extent, Europe) gripped investors. The panic caused a correction large enough to more than offset the positive movement either side, but it quickly faded. The S&P 500 Index is currently down -0.5% ahead of the Friday open, having suffered a -2.6% fall on the fateful day itself, and despite ending 3/4 days this week in the green. Over the same 4-day stretch, the pan-European STOXX 600 Index was also down -1.6% thanks to a similarly sizable -2.8% loss on Wednesday. Since trading opened on Friday morning, however, the STOXX has added another 50bps to this week’s tally, while S&P 500 futures are also well up overnight. The mid-week losses were mostly in developed markets, and the MSCI EM Index remains positive for the week (up 31bps in USD) so far. Indeed, for EM investors, a bigger worry than the coronavirus (which is now ravaging Brazil and India) appears to be the future of the US-China relationship after various comments by US officials; firstly, that the Phase One Deal is dead (which has since been rejected by the White House); and, secondly, that the President may be in favour of decoupling the US economy from China’s (which has not been). Meanwhile, in fixed income, investors have mostly seen corporate bond spreads widen this week – with a 20bps move in US HY on Wednesday alone – while government bonds have rallied.
On the coronavirus, there are worrying signs coming out of the Southern United States. In Texas, the Governor has been forced to pause the state’s reopening and cancel all elective surgeries amid a sharp spike in infections and as Houston ICU wards are reported to have hit capacity this week (prompting hospitals to implement surge plans). In Florida, where case numbers are now rising at a rate of 4-5% per day (i.e., similar to Brazil and India), the otherwise Trump-y Governor has also abandoned plans to reopen further, and several hard-hit counties have made mask use compulsory. For the US as a whole, multiple data sources now suggest that the coronavirus reproduction (or ‘R’) rate is above 1; and, yesterday, the country reported a whopping 39,818 new cases – a record daily rise, and higher than at the peak of the crisis in late April. This should give investors pause, even if an increase in testing is responsible for some of the increase in positive cases.
To be sure, the virus is by no means spreading evenly across the US and progress is still being made in some states. For example, in New York and New Jersey – once at the centre of the epidemic – cases continue to fall off, and there has been no need to pause reopening plans. Instead, both states have implemented a 14-day quarantine for those arriving from the most heavily impacted states to the south. Nevertheless, the outbreak seems to be entering a dangerous second phase in the US, and a return to draconian restrictions on households and businesses in some states and cities cannot be ruled out. Of course, the Donald is playing down the surge in infections hitting Trump-country, but the numbers speak for themselves, and some high-frequency data suggests that consumers have already become more cautious as a result. With greater testing capacity, US government preparedness, and knowledge about the virus today, a second wave is unlikely to carry the same economic cost as the first. But it could put paid to the improvement in the data that has been evident in recent weeks. For example, just this week flash June PMIs for services and manufacturing came in at the highest levels they have been in four months (albeit still in contractionary territory). It is hard to imagine much of a recovery if the coronavirus is set to return. And with the November election creeping closer and Trump polling poorly in many swing states that he won in 2016, the odds have clearly shifted in Biden’s favour. Although, ‘Sleepy Joe’ is a fan of Wall Street, at least a partial reversal of Trump’s signature tax reforms now seems likely.
Globally, too, it is clear that the pandemic is far from over, with 1m of the >9m confirmed cases having been recorded in the past 8 days and, tragically, the coronavirus now spreading rapidly in those regions such as India and Latin America that will struggle most to contain the fallout. However, the markets do not seem to be paying attention. Safe in the knowledge that governments and central banks stand behind them (ready with another massive fiscal or monetary cannon at a moment’s notice), investors are happy to look at the horizon and avoid any awkward confrontations with the immediate future. A fight with the Fed is one that even the coronavirus seems to be losing…