Europe Battles Second Wave Coronavirus Lockdowns As China Goes Mask Off, Party Time
The second wave of coronavirus is rolling into Europe. Whether or not this is a bad thing, or just something we will learn to live with, remains to be seen. Markets think we will learn to live with it. That’s the consensus view.
But the risk, of course, is that European governments will react more in line with how the Australian and New Zealand government has reacted to mini-outbreaks and not like Sweden, or the southern states of the U.S.
Many political leaders are of the mind that so long as the number of coronavirus cases is rising, whether it’s just a sore throat and a daylong fever, or a week in an ICU unit, the economy must be restricted. It’s a tug of war between those that want lockdowns until a vaccine is out, and those who want us all to tough it out. Over the weekend, people in Spain took to the streets in large crowds, some without masks, to protest their governments return to restrictions.
As a result of this tug of war, the global economy is now seen losing its mojo, Barclays Capital economists believe.
Economic data from last week suggests some slowdown in activity following the initial snapback when lockdowns ended in China, Europe and the U.S.
Uncertainty is rising most in Europe, and in the U.S. the concern among the investor class is a bickering Congress stalling on stimulus, and a brewing, new Cold War with China.
“Our outlook for the global economy included a fairly sharp recovery in activity following the emergence from economic lockdowns, but it also anticipated that growth momentum would ebb and become more uneven as lockdowns moved further in the rear view mirror,” says Christian Keller, head of economics research for Barclays in London. “The incoming data is consistent with a global economy transitioning away from unambiguously broad-based upward momentum.”
In other words: some countries are better than others. Those that open: good. Those that close: bad.
In the drivers seat, like it or not, is China.
China: Best One Double Plus
China’s fixed asset investment grew for the fifth consecutive month, rising 6% year over year in July thanks to the usual gains in real estate investment.
Credit trends, construction, and the rebound in Asian growth are expected to support the further recovery in investment in China over the remainder of the year.
China, the epicenter of the global pandemic, is not trusted on its number of SARS-Cov-2 cases, under 100,000 with less than 6,000 deaths. But some people believe that the first version of SARS that swept through China in 2002-03 may have led to an immunity build-up sufficient enough to keep this newest incarnation at bay. This may explain why Asian countries have had few problems in the pandemic than Europe and all of the Americas.
“We are long China,” says Vladimir Signorelli, head of Bretton Woods Research, a macro investment research firm. Signorelli prefers the X-Trackers China A-Shares ETF, known in the market as “Asher”. (Sidebar: I like KURE by KraneShares, but don’t own it yet.)
Yes, July retail sales in China were not great. The pace of recovery in household spending is slower than the impatient market would like. But solid gains in auto sales have helped stabilize industrial production, which held steady at 4.8% annualized in July.
Keller says he sees risks to his 5.2% annualized third quarter GDP forecast in China, mainly due to slowdowns in Europe and Australia, and the geopolitical stress with the U.S..
‘First World’, Second Place
The U.S. labor market is returning, but there are risks of more layoffs as restrictions return in some states, according to a recent study led predictive technology firm RIWI and the Job Quality Index. Perhaps more importantly, demand remains soft across the service sector, and with urban hubs like New York City still seeing businesses shut down, the market is mixed on what the fallout of this pandemic really looks like.
For now, it’s literally In God We Trust, the phrase printed on the dollar bill; bills being shoved into the economy by the Fed and Treasury.
The good news is that U.S. retail sales in July were better than their February readings and jobless claims data suggest labor market momentum is better than the bears believe.
Households have quickly shifted spending patterns toward goods, while spending on travel and restaurants is weak.
Auto sales have done well here, too, rising 3.4% in July over June sales and after falling about 20% from their peak. U.S. manufacturing output is now only 8.3% below pre-pandemic levels.
And then there is Europe, a market Blackrock BLK recommended overweighting last month.
The pandemic in Europe is witnessing a second wave. The question for everyone is whether the Europeans will order everyone to stay at home again. If we have learned anything about the virus, it is that we cannot hide from SARS 2. On the other hand, we have also learned that governments are not playing around and will shut things down quickly.
Summer beach towns on the Med are being blamed for the recent spike in the number of fresh SARS 2 cases.
Markets will be watching for death spikes. Death tolls — if higher than expected, or in line with the first wave mortality rate — are negative reads for the momentum factor quant funds that trade fast off of bad news.
As an example of a rollback of reopening: the UK recently added France to a list of countries from where people must quarantine upon arrival and EU countries have tightened restrictions again for travel and other activities. Phased reopening in Europe is on pause.
This week’s Flash PMI data in Europe should give investors fresh clues as to how much the economy is decelerating. Keller at Barclays says he expects the composite outlook PMI to come in at 53.8, down 1.1 points from July, but still in growth mode.
“We remain of the view that notably lower mortality rates and countries’ general better preparedness to deal with new outbreaks mean that wider lockdowns will be avoided,” says Keller, a view every bull in the market shares.
Business associations have been warning of the “disastrous consequences” of forced closures.
Small businesses in urban hubs in the U.S. are losing their patience. Between forced business closings and violent protesters in a handful of cities, business as usual is nowhere near back.
Moreover, people outside of the epicenter cities that have not suffered at all with deaths and illness are tired of all the restrictions. A recent Ipsos poll, released last week, showed that more people than not believed either they would be laid off again, or someone they know would be laid off again if the economy does not reopen soon.
Politicians in an election year are likely to avoid talks of forcing people to lock up, Barclays economists believe. If Wall Street always picks the presidential winner, then the pro-lockdown politicians should lose in November.
UBS Global Wealth Management’s Dirk Effenberger, head of investment risk, said the landscape looks good for equities for the next 12 months providing government stimulus isn’t locked down, too.
“We are in risk-on mode,” Effenberger says.