COVID-19 – again, a mixed picture
As of 25 August close to 24 million cases of COVID-19 have been recorded and over 800,000 fatalities have been registered.
After several months in which the United States has been centre stage, attention is shifting back towards Europe, where there has been a clear increase in the number of reported cases in recent weeks, although to date there has not been a corresponding surge in hospitalisations and fatalities. This predominantly reflects a combination of two key factors:
- Firstly, cases have likely decoupled from hospitalisations and deaths on account of what could loosely be called the iceberg effect. At the start of the crisis there was limited testing capacity and the people who were tested for COVID were typically those who already presented with acute symptoms. There was unsurprisingly a pretty close link between cases and hospital admissions and deaths because we were only observing the worst cases. Most people who caught the virus and presented with mild symptoms did not need to be admitted to hospital. They were not tested and therefore not included in the statistics. Now that testing capacity has increased we will continue to capture the acute cases but we also can identify and record many more of the mild cases. So long as testing capacity does not diminish it is reasonable to assume that this feature will persist.
- Secondly, the demography of the caseload has shifted. For example, in the United Kingdom the number of cases has risen in almost all age groups in recent weeks except those aged over 70, but the increase has been particularly marked among people under the age of forty. This shift in the caseload away from those most likely to present with acute symptoms towards those groups that are least likely to present with acute symptoms will inevitably cause cases to decouple from hospitalisations and deaths. Whether this feature will persist is less clear. If the virus is spreading rapidly again through the younger cohorts of the population then it may be difficult to prevent it reaching the older cohorts who are more susceptible – particularly when one considers the possibility of transmission within households – and then with a brief lag that would lead to rising hospitalisations and fatalities.
The situation is a clear cause for concern. The Robert Koch institute in Germany has warned that the entire population must continue to consistently observe social distancing rules including outdoors, and where appropriate wear face mask correctly. The principal policy response has been to mandate the wearing of face masks in an ever increasing share of the public sphere, including the classroom. We suspect that forceful action on this front will prove sufficient to prevent a recurrence of the health crisis of Spring 2020 and ultimately a return to full lockdown. However, an increase in fatalities seems likely and we note that the French Prime Minister is ruling nothing out.
Trials for a vaccine on track
On a slightly more positive note, we have been tracking the progress of the Oxford University research team for many months now in their search for a vaccine and there is reassuring news that the trials which are taking place in the United Kingdom, Brazil and South Africa and soon the United States are still on track. Professor Andrew Pollard commented that “it is also just possible that if the cases accrue rapidly in the clinical trials that we could have that data to put before regulators this year” whilst the head of the Paul Ehrlich Institute (the federal agency responsible for vaccines in Germany), stated that if the trials show that vaccines are effective and safe then “the first vaccines could be approved at the beginning of the year”. However, it is less clear to us that good news on this front would have a seismic impact on risk assets – in part, because it appears that investors have brought forward expectations of the likely arrival of a vaccine and in part because of the rally in equity prices.
Economic data – slowing momentum?
As far as economic data goes, the key release over the last week was the preliminary batch of Purchasing Manager Indices (PMI) data for the Eurozone in August. These data remain a core indicator of the current state of the business cycle, as companies report month-to-month changes in activity, orders and employment far in advance of the official data. The latest PMI data are not entirely encouraging. The headline activity balance in the eurozone fell back to a 2 month low and the balance for the services sector retreated to within a whisker of the 50 “no change” mark. To some extent, this reflects the fact that the PMI data exclude the retail sector, which has recovered more than most, but includes the tourist-facing sector, which in some places may have been affected by the return of travel restrictions. Nonetheless, the data do suggest a loss of momentum in the recovery.
The GDP data released in recent weeks enables us to provide a comparison of the variations in second-quarter 2020 GDP among developed economies relative to the previous quarter. In Exhibit 1 data for US GDP is not shown on an annualised basis (-32.9 % in second quarter 2020) in order to compare it with the European data. These are of course the first estimates of GDP and may well be subject to greater revisions than usual. Differences between countries are linked partly but not exclusively to the severity of the lockdown measures. The structure of the respective economies also plays a crucial role. In particular, the importance of services such as the tourist industry within GDP is probably the main cause of variation. Household consumption, which has fallen heavily everywhere, is another important component of GDP. The behaviour of and state of mind of consumers with regard to employment spending and saving will be critical in coming months.
US policy centre stage
The United States is centre stage on the policy front for a number of reasons. First, we are almost through conference season before the final sprint through the presidential debates and then Election Day on 3 November. Joe Biden continues to enjoy a significant lead in the polls and the Democrats still appear to have a significant chance of taking back control of the Senate whilst retaining control of the House. Speaking of Congress, there has been a failure to agree a fresh stimulus package and little progress is likely in the coming days. Failure to deliver would pose a material downside risk to the recovery in the United States.
Finally, attention will now turn to the Jackson Hole conference, which takes place online this year, and in particular on the comments by Chair Powell about the Federal Reserve’s review of monetary policy, including how it calibrates interest rates and other tools to try to reach its inflation aims.
Markets quiet ahead of Fed meeting
US government debt prices have fallen slightly this week. As a result, the yield on 10-year US Treasury note climbed 3 basis points (0.03 percentage points) to 0.712%, bringing the rise since the end of last week to about 8 bps. US Treasury note yields have increased from around 0.5% cent at the end of last month. German and UK sovereign debt have followed their US counterparts, with the yield on the benchmark 10-year German Bund rising 2 bps to minus 0.4%.
In Europe, stock markets have steadied ahead of the Fed meeting, balancing a record-breaking streak on Wall Street. Asia-Pacific stocks have traded without great enthusiasm from investors, even in the wake of another record run on Wall Street, as optimism on US-China trade talks has dissipated
In the US the S&P 500 index is set to remain close to a third consecutive record high that it set yesterday at the close. The technology-weighted Nasdaq Composite is also close to its recent highs. These indices are on course for their fifth straight monthly gain. The S&P 500 has climbed more than 5 %, with the Nasdaq up nearly 7% so far this month.
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