Worldwide COVID-19 cases exceeded 6.4 million, leaving world case growth near its cycle highs; growth in mortality rates, however, has fallen by nearly half from the March-April peaks, reflecting the shift in the focus of the pandemic towards emerging markets. Here, mortality rates have been consistently lower than in developed markets. Meanwhile, curves continue to flatten in the US and in particular in major European economies. Globally, deaths topped 382 000, as of 3 June.
Easing spreads across Europe
All major European countries have now eased the restrictions put in place to slow the spread of COVID-19, the Oxford Stringency index shows. Some countries are easing faster than others. Italy, in particular, stands out. Where the restrictions were once seen as the toughest in Europe, Italy now ranks as the laxest, with Spain now assessed to have the toughest regime.
Latin America remains the current pandemic hotspot: four out of the 10 countries reporting the highest number of new infections in recent days are from the region: Brazil, Peru, Chile and Mexico.
Brazil is now second only to the US in terms of confirmed cases and is fourth in fatalities after the US, UK and Italy. Brazil’s mortality curve remains worrying, and since there is no national lockdown, it is hard to tell when the peak will be reached.
No plain sailing after lockdown
Meanwhile, events in South Korea remind us that managing the virus outside of lockdown is not straightforward even for the best-in-class regime. South Korea reintroduced quarantine measures for the next two weeks due to the recent uptick in cases: parks, museums and art galleries were temporarily closed and school quarantine and distancing rules in Seoul were tightened.
On Thursday, 79 new cases had emerged, the highest since early April. Most of them were attributed to a single distribution centre for an online retailer. The new cluster led provincial governments in the region to postpone plans to reopen schools for kindergarteners and primary schoolers on Wednesday, although most of the country’s schools have reopened as planned.
The main news in recent days has been the announcement by the European Commission of the details of the long-term budget, the Multiannual Financial Framework (MFF), and its response to the current crisis, Next Generation EU.
Markets had focused on the latter. The Commission proposes a EUR 500 billion package of grants and EUR 250 billion in loans to be financed by debt issued in the capital markets. This is backed by the headroom in the EU budget between actual spending and the theoretical limit on the funds that the EU can claim from the member states.
Next Generation EU sets out an important principle: establishing a genuine fiscal capacity at the centre of Europe, which can be deployed to support demand in member, states that are hit by large shocks.
However, the details of the package are yet to be agreed by all member states. It seems likely that the generosity of the scheme may be diluted in the search for a compromise. The scale of the net transfers may be reduced. The conditionality attached to funds that already exists may be strengthened. The split between grants and loans may be recalibrated.
There have been two significant developments:
- The fallout from the decision by the Chinese authorities to introduce national security legislation in Hong Kong’s Basic Law. This has added to tensions in Sino-US relations over and above the blame game over the virus and an uneasy truce in the trade/tech war. There is a real risk of an escalation with obvious market consequences: China’s Foreign Ministry has warned, “Any words or actions by the US that harm China’s interests will meet with China’s firm counterattack.”
- In the US, George Floyd’s death has led to widespread public protest and instances of violence that prompted the authorities to impose curfews in cities and deploy the National Guard in multiple states. As yet, it is unclear whether this latest tragedy will trigger a moment of national reflection on the question of racial injustice and ultimately positive change, and whether more immediately it affects the presidential election.
- In an encouraging sign, US continuing claims for unemployment benefits have dropped for the first time since February. This points to the first green shoots in the labour market as quarantine restrictions are lifted. Any recovery hinges on improving employment for the bounce-back to be sustainable over the medium term. It is also crucial to keep social tensions to a minimum.
- We believe the economic environment remains weak and that the recovery will take longer than expected. This assessment is echoed by the ECB. Most developed economies will not have returned to the 2019 levels of activity by the end of 2021. In Europe, a greater dispersion in growth among countries has increased divergence. This is a key reason to have a unified fiscal approach, as per the latest European Commission proposal (see above).
- We expect further stimulus and central bank support given this weak outlook. On 4 June, the ECB is expected to announce a EUR 500 billion increase of its PEPP programme. It comes on top of the EUR 750 billion package proposed by the Commission. Extra packages by Japan, China and Germany all aim at securing a recovery and stabilising badly hit small and medium-sized firms.
- Government and central bank support is expected to ease financial conditions, especially in Europe where they have remained restrictive, and could lower the risk premium of eurozone assets and support the euro.
- The current backdrop supports risky asset valuations, even as the real economy struggles. The outlook for the US dollar is less solid: carry and growth advantages over the rest of the world have dissipated and political risk, once a US dollar supportive factor, has become a headwind.
- Investment-grade (IG) corporates have been tapping the market at a record pace and rotating away from funding via commercial paper (CP). This is further easing the stress on USD liquidity and demand for the US currency. Moreover, it creates a stronger liquidity backdrop for higher-rated corporates. That said, we see continued stress for the weaker companies and sectors most affected by the virus outbreak, creating greater dispersion in credit and equity markets.
- A slow weakening of the USD could enhance emerging market (EM) carry trades. Prospects look better for the less volatile Asian currencies over the more market-sensitive currencies as many of these countries have now become the new epicentres of the COVID-19 crisis (see above).
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.