US: a rethink of exit strategies
Across the US, 30 June saw more than 48 000 coronavirus cases – the most of any day of the pandemic. Officials in eight states — Alaska, Arizona, California, Georgia, Idaho, Oklahoma, South Carolina and Texas —announced single-day highs.
The record came on the same day as Dr Anthony Fauci, America’s top infectious disease expert, told Congress that the rate of new coronavirus infections could more than double to 100 000 a day if current outbreaks were not contained. He warned that the virus’s progression across the south and the west “puts the entire country at risk.”
The spread of the virus in the US is already forcing a rethink of the exit strategies from the lockdowns. States that had reopened either partly or completely are reversing course. The public appear to be taking matters into their own hands: retreating from public places such as restaurants and bars for fear of catching the virus, even when public policy does not require them to do so.
China: Beijing outbreak contained, but a new spike in Hubei
In China, the outbreak in Beijing has been brought under control, according to the Chinese Centre for Disease Control and Prevention. The lockdown measures imposed on several communities in Beijing have been lifted.
However, new measures have been introduced to control a fresh outbreak in nearby Hubei province. An area with almost half a million people in Anxin county, less than 100 miles from Beijing, has been sealed off under the same strict protocol that was imposed at the height of the pandemic in Wuhan earlier this year.
The news from Germany has been a little more encouraging with the estimates of the effective reproduction rate by the Robert Koch institute now back below one after a brief foray above two.
Containment without lockdowns and with a vaccine?
We think that the message from China and Germany is clear: it is possible to contain the virus outside of lockdowns, but it may require severe quarantine measures or a highly efficient test-and-trace regime that is capable of managing local flare-ups.
We continue to struggle with the idea that exits are straightforward and life can quickly return to normality in the absence of a vaccine. Indeed, we note comments by Dr Fauci that a vaccine might not be sufficient to generate herd immunity in the US because the vaccine might not be entirely effective and a significant minority of the population might refuse to take the vaccine.
Policy: slow progress in Europe
There is steady, but slow progress in Europe. Meeting in Meseberg, Chancellor Angela Merkel and Emmanuel President Macron reaffirmed the importance of a recovery fund that “has to really help those countries that are otherwise at risk of being much worse affected by the crisis”. However, there was also recognition of “some resistance to be overcome”.
Today, Germany assumes the rotating presidency of the Council of the European Union for the next six months. Chairing the meetings of ministers of member states will allow Berlin to shape the agenda more so than usual. Other countries will be looking to Germany to help broker compromises rather than to pursue specific national interests.
These next six months can be seen as crucial for Europe as the continent struggles to cope with the worst peacetime recession ever. If the EU can agree on the most impressive act of cross-border solidarity ever along the lines of the EUR 750 billion fund proposed by the European Commission, the EU and the eurozone could emerge stronger.
Any perception of a lack of solidarity between the lesser-hit north and the worse-hit south could undermine the cohesion of Europe. We expect European leaders to reach agreement on a fund eventually, but we suspect that the plan originally proposed by the Commission will be watered down.
Beyond fixing a course for the EU’s post-pandemic recovery, the region’s future relationship with the UK will also need to be re-defined before the end of the year.
QE challenge countered
The ECB has seemingly managed to defuse the row over the legality of its quantitative easing (QE) programme by publishing a defence of the scheme in its latest set of policy meeting minutes. German parliamentarians appear to be satisfied with this response, although it might be more accurate to say that they want to make the problem go away.
However, it is worth noting that the ECB emphasised the importance of respecting the capital key and issue limits in the design of an appropriate asset purchase programme, and that in turn could constrain the capacity of purchases in the future.
Meanwhile, the Standing Committee of China’s National People’s Congress is reported to have voted unanimously for the controversial national security law covering Hong Kong. In response, pro-democracy opposition party Demosisto has announced that it will disband. The US is revoking Hong Kong’s special status.
Markets and data
- Economic data continues to improve as lockdowns are eased (selectively). China is leading the way with manufacturing and services purchasing managers’ indices (PMIs) at above 50 and new export orders rising sharply. Levels of mobility are continuing to increase. This could help the real economy to rebound at a faster pace than was originally envisaged.
- However, concerns about pockets of rising numbers of new infections are weighing on market sentiment. This concern is tempering any move higher, causing markets to drift sideways. At the same time, monetary and fiscal support continue to underpin economies, and by extension markets, and buoy risky assets.
- In response to the Covid-19 crisis, we have seen USD 263 billion in ‘pandemic bond’ issuance, driven by companies and development banks to counter the negative economic impact of the virus outbreak; 51% of this pandemic bond issuance has come from China.
- Demand for high-yield (HY) bonds may rise as companies cut dividends. Central bank support appears to be making investors less wary of HY, particularly higher-rated HY issues. The new issue market has surged, with funding costs down significantly. This has dramatically improved the balance sheet liquidity of many HY companies and continues to cause risk premiums to tighten. That said, we expect downgrade and default risks to be higher for smaller and lower-rated HY companies.
- Outflows out of money market funds are accelerating. This excess cash, which had sought a safe haven during the height of the pandemic, is now looking for better returns. This continues to contribute to demand for risky assets and compress risk premiums.
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