Global Demand Picking Up As Investors Refuse To Relent

Global demand continues to drive the recovery in markets around the world, even as countries from Israel to southern Europe are still struggling mightily with the pandemic.

Since the spring, the fall off in demand due to lockdowns led investors to believe that demand would pick up once those lockdowns ended. They have. Only not uniformly, and definitely not globally. Israel has announced new three week long longdowns this weekend.

But they are the exception, rather than the norm. Demand is returning. The physical economy, always a laggard to the stock market, is catching on. The V is forming.

The economies of Asia, most notably China, have benefited from strong goods demand in developed markets with the U.S. now back to importing Made in China goods. The July trade deficit was over $60 billion between the U.S. and the world, led by China.

Looking at this trading week, the Fed is likely to begin its pivot from stabilization to accommodation, and the Bank of England is likely to contemplate potential dovish moves, both being positive for equities.

China Up, Up, And Away

The rebound in China trade data exceeded expectations in the first months after they lifted lockdowns and led many to question whether the bounce was sustainable.

The extent of the rebound into August, with exports currently surpassing their pre-pandemic levels, now appears to challenge that view. It’s sustainable.

China is uniquely positioned to benefit from current developments in the U.S. economic recovery due to the high demand for medical goods — from face masks to essential medication – that are mostly all made there. Some 80% of China’s exports in this space goes to the U.S. and Europe. Plus, healthy household consumption and unprecedented stimulus packages remain a boost.

As far as the pandemic goes, travel restrictions remain in China, limiting demand for that sector of the economy but at least keeping new cases of the SARS 2 virus at bay.

The latest trade data out of China show that the rapid rebound in private consumption has also moved non-medical related exports in China above pre-pandemic levels, and has been moving in the right direction since April.

China’s stock market has beaten the Nasdaq over the last three months.

China’s A-Shares are the best market in the world and has bean Nasdaq

“The ongoing global economic recovery will be important, but the elections will be key,” says Craig Chan, a China bond analyst with Nomura. “A Biden presidential victory will likely to result in an acceleration of inflows into China.”

U.S. Stimulus: Do We Need It?

Then there’s stimulus. Does the U.S. need it? States sure do. They have been locked down for months, with restrictions still in place in important economies such as New York and California. A decline in tax revenues there means they will need bailouts to pay for state pensions, among other things. A Biden would would likely come with state bailouts, assuming the legislative branch approves.

The case for state bailouts is the crux of the stimulus story now, with one party setting up the other for a political showdown come the end of September.

The Senate recently failed to agree to a more streamlined Phase 4 stimulus package that would have reinstated pandemic unemployment insurance and bolstered funding for the Paycheck Protection Program, as well.

All is not lost yet.

“We retain our outlook for Phase 4 stimulus, but with low conviction,” says Michael Gapen, U.S. economist for Barclays.

The door for passing another stimulus bill is closing as Congress will also need to devote time to pass a continuing resolution to fund the federal government by September 30 to avert a shutdown.

Political power plays aside, the Fed’s got the market’s back.

This week’s Open Markets Committee meeting should be a good opportunity for the Fed to update its intentions for more securities purchases.

The market has been lifted substantially thanks to Fed support in the bond market in particular, and consensus bets on the Fed saying those asset purchases will continue at least at their current pace to put downward pressure on longer-term interest rates.

The Fed is also unlikely to alter its policy rate guidance in September. Most Fed members appear to want greater clarity on whether the physical economy really has bottomed, and the V is still being drawn, or is this going to be a W?

The U.S. economy has been fueled by lending stimulus programs, including PPP. The third quarter is expected to have grown 25% or more, recovering much of the 33% decline registered in the second quarter. 

Demand is of the essence here.

Small businesses, helped with emergency, long term, low interest rate loans, were able to make investments. Sole proprietors at places like Uber UBER qualified for unemployment insurance from the Federal and State governments, giving them more money than they would have made on the job. Some people made big money in the markets since the lows of late March. Stuck at home, they took to home improvement projects.

Still, the dramatic turnaround in GDP has a lot to do with that stimulus, and the concern over stimulus dying out justifies concerns of a market about to hit the brakes. No one is betting on this for Monday, though.

“The current stimulus stalemate in Washington creates questions around the recovery pace from here,” warns David Waddell, chief investment strategist for Waddell & Associates . 

So long as demand continues apace, the less-loved, higher risk stocks in the mid-cap and small-cap range should do well.

If stimulus is taken off the table, small cap value stocks will be the most economically sensitive to bears. The fading odds of a stimulus package has taken the shine off that trade, Waddell says.

Lastly, continued lockdowns without offsetting stimulus restrain economic growth in emerging markets, too, Waddell says. “It may seem like I am nitpicking since they both outperformed during the sell-off, but to really mark the contrarian turn, we must see conviction surrounding the durability of this economic recovery.”

Comments are closed.