COVID-19 is rearing its ugly head in many US states and also elsewhere. What metrics should we watch for the next market reactions? Valeria Bednarik, Joseph Trevisani, and Yohay Elam thrash out the situation on the ground, the latest economic data, discuss various safe-havens, and more.
Yohay Elam: Coronavirus is on the rise in the southern US and adversely impacting markets worldwide. The greenback and gold are on the rise while the yen seems to lag behind as a safe-haven. Our readers are interested in the price of gold. Do you think it is fully related to COVID-19 or does the precious metal have other reasons to shine?
Joseph Trevisani: California also... Yes, yesterday's move in equities was virus related. The equity recovery is based on an open US economy If the governor of Texas is worried, then equities should be also
Valeria Bednarik: It's virus-related for sure. Remember not long ago we were discussing "recovery in the second half of the year." Well, the second half of the year is here and the pandemic is only getting worse. Economic recovery is moving farther away
Joseph Trevisani: The yen safety trade is more an Asian-China relationship and the US-China trade front is relatively quiet
Yohay Elam: Referring to your points, are markets already pricing in a lack of recovery in the second half? Or an imminent lockdown announcement in Texas or perhaps other states? Or could additional bad news hit stocks?
Valeria Bednarik: The market has not yet fully priced in what we are seeing these days, the US reporting the most one-day new cases. But for sure will start to do it these days, if we don't see a change, which has little chances of happening
Joseph Trevisani: No, I don't think new restrictions are priced in yet, but even the possibility was not around last week, this is a new development
Valeria Bednarik: Exactly
Yohay Elam: With ICU capacity nearing its limits in Houston, perhaps restrictions are likely soon
Joseph Trevisani: The dollar is rising this morning. Standard capacity is near limit in Houston but they have double than in 'surge' capacity
Valeria Bednarik: Restrictions are proving to be a temporal patch.. which is even more worrisome. Once again, the focus is on a vaccine, and in the best-case scenario, it seems the world will be in and out restrictions until early next year. Not a great picture for sure.
Joseph Trevisani: USD/CAD back over 1.3600, Euro below 1.1200...
Valeria Bednarik: The longest the economic stalemate, the longer the recovery. With what's going on these days, it would be optimistic to talk about economic comebacks in the second half of 2021
Yohay Elam: Businesses that expected a short period of hunkering down may now conclude that this is going to take longer, go bankrupt
Joseph Trevisani: If the US is forced to close down again to almost any degree I agree.
Yohay Elam: A blow to confidence all over the world
Valeria Bednarik: Yups. That's why it would take longer
Joseph Trevisani: Agreed unfortunately
Valeria Bednarik: Well, the picture replicates around the world, so not sure if it will hit confidence that hard. Germany put under lockdown 600,000 people this week, right? We can focus on the US, but this is a global situation...
Yohay Elam: It depends on how localized these flare-ups are and how quickly they are put down
Valeria Bednarik: Yes, agreed
Yohay Elam: Several counties here in Spain have also suffered setbacks and restrictions were reimposed. It seems under control here but could get out of control quickly
Joseph Trevisani: Logically cases and hospitalizations were always going to rise when countries opened. The hope was hospitalizations would remain manageable as the vast majority of infections were minor if that is not the situation if hospitalizations are an issue. I think the key is hospitalizations. California has as big a problem as Texas yet they did not open early and kept may restrictions in place yet they have the same situation. Many restrictions
Valeria Bednarik: Yes, the key is hospitalizations. And about Texas, the situation seems to be the worst then, as despite the many restrictions the numbers of cases keep rising
Yohay Elam: Here in Spain, wearing masks in public transport is obligatory. Several US states now call on people to wear masks. I guess they will make it mandatory
Valeria Bednarik: Half the US refuses to wear masks... and yes, they are making it mandatory, but those than don't use it, follow the example of their President. You can't ask people to do something and don't do it yourself. It doesn't work. At any level
Yohay Elam: Indeed, a personal example is critical. VP Mike Pence wore one in the past few days, maybe the president will follow. Unfortunately these pieces of cloth turned into part of the culture war
Joseph Trevisani: The interesting thing about the virus this time is that fatalities are not rising. It could be they will but as of now, there are flat. And the average age of the cases is far lower than it was
Yohay Elam: With every day that passes, doctors have more knowledge and tools to treat patients. Lockdowns helped with buying time
Joseph Trevisani: It will be hard to put lockdowns back in the US
Valeria Bednarik: True. The thing is, experts are still learning about it. They believe the death rate is higher among older people and now are the youngs getting it. But nobody can say for sure that health systems won't collapse because the cases will be less severe.
Yohay Elam: The seven-day average in the US is below 600, down from the peak above 2000
Valeria Bednarik: Average daily deaths?
Joseph Trevisani: Yes, but the hospitalization situation can be monitored and addressed. The difficulty is the lag time. Dow futures are down 200, not an unusual amount...
Yohay Elam: But it can rise quickly, especially if hospitals are overwhelmed
Valeria Bednarik: Yups
Joseph Trevisani: This situation is going to take several weeks to play out
Yohay Elam: Even without a higher death rate, consumption is likely to fall. Consumption in Sweden crashed by nearly the same amount in Denmark despite much laxer restrictions
Valeria Bednarik: And here we go back to the beginning of this conversation: economic comeback nowhere at sight.
Joseph Trevisani: The US consumer went to town in May but much of that could be deferred consumption. June will be more telling
Yohay Elam: A Nike swoosh was probably too optimistic. Perhaps the mirror image of a square root. Sharp fall, sharp rise but only to half the previous level, and then a straight line
Joseph Trevisani: I think June will tell in consumptive and jobs
Valeria Bednarik: Yups, and that's why are at a stone thrown away from panic selling in stocks
Yohay Elam: I don't see panic, as the Fed is always out there to help, and tech stocks have reasons to rise.
Joseph Trevisani: I don't see panic either. Markets rarely react to the second instance as rapidly as they did to the first.
Joseph Trevisani: But we are coming from a multi-year unstoppable rally and heading into the worst set-back since the Big Recession...
Joseph Trevisani: Durable goods orders much stronger than expected. 15.8% vs 10.9% expected and -17.7% in April, so it seems the May surge in spending carried to big-ticket items also, and business spending was stronger, 2.3% vs 1% expected also, but to repeat myself, the situation has changed again and June will be the important month
Yohay Elam: Better than expected, but still a reverse checkmark, not a V. June's figures could complete a V, or not
Joseph Trevisani: One month doth not a recovery make
Yohay Elam: With the virus raging, I think the V-shaped recovery is long forgotten. Pre-pandemic GDP levels will have to wait until 2022
Joseph Trevisani: Neither currencies nor equities have priced a dire situation yet. For me the Texas governors warning was notable
Yohay Elam: Not only in the US
Valeria Bednarik: Yeah, orders recovering 15.8% sounds good if it weren't by the previous -17.7%
Joseph Trevisani: A v-recovery was always based on no viral return. Agreed.
Valeria Bednarik: And seems weekly unemployment claims around 1.5M is the "new normal," also
Joseph Trevisani: It is impossible to disentangle deferred spending from normal
Yohay Elam: Government support is pushing income higher, so we may certainly see some deferred spending, not on restaurants, but perhaps on durable goods. Perhaps the next significant market move depends on more government stimulus?
Joseph Trevisani: Yes, though where I am restaurant are open for outside dining, and soon inside
Valeria Bednarik: Another stimulus package is already in the makes, right? $1.3B
Yohay Elam: It is under discussion in the White House and in Congress, between Republicans and Democrats. I believe they will reach an agreement. They cannot agree on much but they will on this. They rolled out so much, I remain optimistic
Joseph Trevisani: Treasury rates reflect the Fed's latest reach into credit markets and US mortgage rates are record lows.
Yohay Elam: Perhaps it's time to buy a house rather than invest in stocks?
Valeria Bednarik: Yeah! in Barcelona!
Joseph Trevisani: Italy
Valeria Bednarik: Also
Yohay Elam: 1.6% fixed rate for 30 years is what my friend got here
Joseph Trevisani: I have toyed with the idea but then I would need a plane to get to it. and that is very unlikely
Yohay Elam: That will take time. I would like to circle back to a point you made earlier Joseph, about the yen moving more on Sino-American relations than on any other fear. A different safe haven for every situation?
Joseph Trevisani: Yes, I would call it a regional safety currency. Not every situation has a safety trade, but for most others, it remains the dollar. Behind the choice is the size and depth of the domestic market, particularly Treasuries.
Yohay Elam: The dollar is always there as a safe-haven. While the yen, franc, and gold occasionally have an advantage over the greenback but often do not
Joseph Trevisani: The great enabler of US deficit spending is the reserve dollar. Where else will the markets go in crisis times? Or to put it another way, if the US financial markets are in trouble the world will have bigger problems.
Yohay Elam: The dollar is the king of cash
Joseph Trevisani: To speculate a bit what criteria will determine market reactions in the US? Shutdowns? Fatality rates? Hospitalization rates?
Yohay Elam: I would rate hospitalizations first. Thinking that you might not receive help if you get sick may keep people at home more than shutdowns
Joseph Trevisani: Yes, I would agree I think that is the key statistic. From there would flow shutdowns if there was no other way to control the spread
Yohay Elam: I would double-check my steps when going down the stairs if I would fear that I couldn't get help if I break any bone. Yep, I think shutdowns are next and fatalities last
Joseph Trevisani: It is interesting that new cases in the US set a record yesterday 45,500 more than in April, but the overall situation in comparison is far better
Yohay Elam: Better preparedness, tests, knowledge. The medical system is in a much better shape
Joseph Trevisani: Exactly
Yohay Elam: Hopefully, the fatality rate remains low
Joseph Trevisani: So I think there is hope that this may be the necessary and foreseeable occurrence
Yohay Elam: Yep, there's hope, but probably far from Larry Kudlow's "20% snapback growth in Q3, Q4." He's too optimistic
Joseph Trevisani: Well, he is paid to be optimistic
Yohay Elam: Indeed
Joseph Trevisani: And we are paid to analyze. I will not say nay yet on the V. But it depends on the course of this outbreak
Yohay Elam: I remain in the pessimistic camp, the mirror square root, and not ruling out an L-shaped non-recovery, the extreme IMF scenario for the global economy. I guess returning to pre-pandemic levels will happen during 2022
Joseph Trevisani: I like the contention and I agree on the 2022 return to per-viral levels, but to date, it has been a bad bet to run against the US consumer
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