The official blog of BNP Paribas Asset Management

Weekly investment update – 12 August 2020

This week, as COVID-19 cases topped 20 million globally, policymakers faced different hurdles to keep the virus from spreading or resurging, with measures including continued or renewed social distancing and stepped-up testing and tracing.

Markets were largely data and earnings driven, roughly two weeks before the summer holiday season ends in many countries and amid some anxiety over (and indeed pressure for) new measures to support the economy and preserve jobs.

US – Measures help to keep cases down

In the US, shortages of testing kits, weather-related disruptions causing lab shutdowns in the south and other technical and reporting issues all affected data quality. The daily test numbers reflected this partly: after making considerable progress, they have dropped over the last 10 days. As a result, fewer new infections are discovered: around 54 000 a day versus around 63 000 a week before.

That said, with 32 states having made the wearing of facemasks obligatory, mandates maintaining various forms of social distancing measures should also have helped to keep the number of new cases down. In addition, the decline in restaurant dining and the plateauing of domestic air travel over the past month have contributed to limiting the spread of the virus.

In this context, Dr Anthony Fauci, the top US infectious diseases expert, said that in the case that an approved coronavirus vaccine was effective only 50%-60% of the time, public health measures would still be needed to control the pandemic.

According to the Centers for Disease Control and Prevention, the death toll is projected at 175 000-190 000 by the end of August. US infections now exceed 5 million, making up 25% of the global total.

Europe – Some countries are reacting forcefully

In Europe, many countries are reporting increased cases although the daily numbers are still well below the peak seen in the spring. Spain is leading the western European resurgence. The share of positive tests has risen to 7.4% from under 1.5% just a month ago, implying that the rise in cases cannot be explained by increased testing alone. This is a concern.

As we have seen in the US, as virus spread picks up, hospitalisations and deaths will inevitably follow with a lag, although this time, if targeted measures are re-imposed in time, we are probably unlikely to see the same level of fatalities as seen in the spring. Countries such as Germany and Belgium have tightened social distancing measures in response to a spike in cases, while Paris has made mask wearing in the busiest streets obligatory. These measures are yet to translate into lower infections.

To summarise, in terms of the market focus on pandemic developments, recent decisions to allow greater mobility and open up certain economic sectors could be tested at a time when people are returning from holidays to their offices, schools are about to open and the weather is about to change. Virus circulation might well rise.

Resurgence meets greater urgency

In Australia and Singapore, it looks like cases are finally peaking, in part thanks to the more stringent measures imposed several weeks ago. Overall, the resurgence in Asia is being met with much greater urgency from policymakers.

New Zealand confirmed four new cases of COVID-19 after 102 virus-free days and responded by locking down Auckland, its most populous city, for 72 hours, ordering schools, childcare centres, bars and restaurants to close and people to work from home.

Reported cases in Africa are exceeding 1 million. The true number might be much higher. 

Vaccine and treatment

Russia announced it registered the world’s first COVID-19 vaccine this week and plans to roll out jabs for domestic medical workers as early as next month. Given the absence of peer-reviewed scientific data to back up the efficacy and safety claims, there is little to get excited about at this point.

Indeed, World Health Organization’s vaccine progress tracker lists the vaccine as still being in Phase 1 trials. WHO spokesman Christian Lindmeier said that all vaccine candidates should adhere to established practices and finish clinical trials before being made widely available.

Hospitalised COVID-19 patients who received transfusions of blood plasma rich with antibodies from recovered patients reduced their mortality rate by about 50%, a new study showed.

Macroeconomic data – The outlook for jobs is clouded

On the data front, the July US labour market report showed continuing progress towards undoing of the shock March-April job losses (see Exhibit 1). However, US employers announced 262 649 job cuts in July as the pandemic continued to weigh on demand, an indication that the job market recovery is slowing.

We believe this should continue to support the loose monetary policy stance of the Federal Reserve. Chair Jay Powell stuck to his view that he is “not even thinking about thinking about raising rates.”  

Looking ahead, employment growth is likely to slow further in August given the increased circulation of the virus and rising risks around continuous fiscal support to US households. Reports said Democrats and the White House remained far apart on key issues such as unemployment insurance and aid for states and cities. President Trump took action on jobless assistance, payroll taxes, evictions and student loans, but this was branded unconstitutional and expected to have little effect.

In the UK, plans to end jobs support were dubbed a grave mistake. At the same time, the Bank of England said it saw no case to cut interest rates to below zero now. It warned the economy would take longer to recover. One in three employers planned third-quarter job cuts, a survey found.

Markets – Looking for stimulus news

US equity markets first focused on second-quarter earnings, then the surprise decline in new jobless benefit claims and next on the stimulus talks in Washington, which also captivated markets elsewhere. The drawn-out talks helped gold keep its shine as investors shunned the US dollar, even as stocks advanced, but later gold appeared headed for its sharpest one-day decline in five months.

US-China tensions rumbled on, if not expanded, as the economic superpowers wrestled over the (perceived) economic and security risks related to Chinese technology, among other issues. President Trump banned US entities from doing business with the Chinese owners of popular video and chat apps. The US also warned again that it would force Chinese companies with shares traded on US stock exchanges to give up their listings unless they complied with US accounting rules.

China hawks latched on to Trump’s campaign against Beijing, sensing an opportunity to push the president even further as he fights for re-election. The US national security adviser warned that China was trying to hack the election, although his comments were met with some scepticism. Beijing said it would sanction 11 US citizens in response to similar measures from Washington.

It is worth noting that if Democratic candidate Joe Biden were to win in November, US policy on China might not change much, although its tone might be less belligerent.

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. This document does not constitute investment advice.

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.

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