Over the last week, the worldwide number of COVID-19 cases has continued to climb, reaching over 2.5 million, while deaths now number almost 180 000. One striking feature of the trajectory of the virus and the evolving public health response is the divergent trends across countries and continents that have appeared in recent days:
- In Europe, there is a clear sense now of being beyond the peak in both new infections and deaths. Hence the focus continues to shift towards exit strategies. Several European countries have already begun to ease their containment measures. Self-evidently, the success of these strategies is a key signpost for financial markets to know whether it is possible to learn to ‘live with the virus’.
- In the US, the situation is different. New cases and deaths have eased in recent days, but it is as yet unclear whether this simply reflects stability in the national hot spot (New York State) or that the US is running up against constraints on testing. The numbers of new infections and deaths are low in the rest of the country, but rising. Nonetheless, three states have decided to start easing lockdown measures.
- In Asia, measures are if anything being tightened to suppress a potential second wave. Singapore has extended its COVID-19 circuit breaker measures to 1 June. This extension was triggered by a spike in new infections in migrant workers’ dormitories. Hong Kong has extended social distancing measures by another 14 days until 7 May, Thailand has extended a nationwide ban on alcohol sales until 30 April in a bid to control the spread by discouraging social gatherings. In Japan, Prime Minister Shinzo Abe has asked for more cooperation from the public in respecting social distancing.
Of course, the ultimate game changer is the design and manufacture of an effective vaccine. Unfortunately, the consensus among experts – and hence our baseline view up to this point – has been that a vaccine is unlikely to become available until 2021. Among other things, it will take time to ensure the vaccine is free of any damaging side-effects and then manufacture it on an industrial scale.
Recent announcements by scientists at the Oxford Vaccine Group and the Jenner Institute are therefore significant in our view. Professor Sarah Gilbert argues that there is an 80% chance that her team’s project will succeed. Her colleague, Professor Adam Hill, has set a ‘fairly modest target’ of producing at least a million doses of the vaccine by about September, after which “It’s pretty clear the world is going to need hundreds of millions of doses, ideally by the end of this year”.
We think it is too early to make these predictions for our base case for the end-phase of the pandemic, but the progress of the Oxford team is clearly a major signpost.
Economic outlook – a glimpse at Q1 growth
Turning to the macroeconomic data and the arrival of information on the scale of the economic contraction ahead, we highlight two pieces of information:
- Ahead of the first estimates of GDP in the first quarter, due next week, national central banks in Europe are publishing provisional estimates of the likely extent of the contraction. The central banks of France, Italy and Spain all estimate a decline by around 5% – this despite the lockdowns only beginning towards the end of the quarter.
- Export data for South Korea for the first 20 days in April suggest that trade has literally collapsed (see Exhibit 3 below). Numbers for core and semiconductor exports fell sharply. By destination, exports to the EU were down by 32.6% on a year ago, -17.5% to the US and -17% to China. The reason we focus on South Korea is not just the timeliness and quality of the data. South Korea did not go into lockdown. These numbers illustrate the weakness of global demand rather than being due to local supply disruptions constraining the production of export goods.
Policy response, further discussions in Europe
Finally, the focus on the policy front this week is on the EU Council meeting on 23 April and the discussions over the common European response to financing crisis measures. Europe does appear to be coalescing around basic principles – in particular, to use the EU’s budget (specifically, the Multi-annual Financial Framework (MFF)) and hence the issuance of Eurobonds.
An informal Spanish position paper on the precise calibration is, in our view, encouraging. We think it would fit the bill in terms of the size of the fund envisaged, the terms of the financing, the provision of support through grants and on the basis of need. However, there is no guarantee that the leaders will agree on this or any other proposal this week.
An update on the market environment
After having extended a rally that had led them to recover over half the fall sustained in March, US stocks yesterday fell by 3.1%. This was their worst day since 1 April. Given the extent of the recent rally, a correction was due as markets assess the damage to prospects for the economy and earnings along with the risk of new outbreaks.
A further slump in oil prices in recent days is also weighing on sentiment as it reflects demand destruction for oil caused by locking down a major part of the global economy.
In Europe, Italy’s 10-year government bond yield has this week climbed to above 2% for the first time in a month, while the risk premium over German bonds has widened to 2.6%. That is not far short of the peak of 2.8% during the March sell-off.
We expect EU member states to continue their marathon talks after tomorrow’s Council Meeting to search for a compromise on how to finance the economic reconstruction. The poor economic and inflation outlook, combined with the ECB’s asset purchase programmes, should keep government bond yields low, and contain ‘peripheral’ eurozone bond spreads.
No time to sell risky assets
In summary, this week’s correction in equity markets comes after a sharp rally. We see it as providing an opportunity to tactically add risk in multi-asset portfolios. Our signposts continue to suggest to us that this is no time to sell risky assets. We continue to seek opportunities to add to our risk positions.