Weekly investment update – 5 August 2020

Concern over the COVID-19 pandemic flared as new infections surged around the world, fanning talk of a second wave of outbreaks in some countries. Officials warned that restrictions to contain the spread of the virus had been eased as far as reasonably possible and that people would be living with it for a long time.

The global COVID-19 case count surged past 18 million and the death toll now stands above 700 000. Infection trends are diverging across the globe, driven by large, populous countries such as the US, Brazil and India. Countries in western Europe and north and Pacific Asia that had been successful in containing the virus in the spring are experiencing resurgences.

The World Health Organization (WHO) warned that there might never be a ‘silver bullet’ for COVID-19 in the form of a perfect vaccine. The WHO added that the road to normality would be long, with some countries requiring a reset of strategy and urging countries generally to keep safeguards and monitoring in place.

US – Urban and rural spread rates are converging

In the US, July saw a reversal in gains
made in the early stages of the pandemic, with new cases rising to the highest
number since the outbreak began. Test positivity rates rose in over 30 states
and several large states reported record hospitalisations. This surge resulted
in the nationwide daily death toll rising to above 1 000 over the past eight days.
It raised questions over whether the economy was healing or sputtering,
unsettling some investors.

According to Dr Deborah
Birx, lead adviser to the White House coronavirus task force, the pandemic
“has entered a new phase. No longer are hot spots or outbreaks contained to
densely populated metro areas like New York City; instead, urban and rural
areas are seeing similar rates of spread.”

At a state level, it looks like situation
is improving in the former hot spot states of Texas, Florida, California and
Arizona, although the death toll has yet to reverse its course in these states.
At the same time, new hot spots are emerging, with cases and hospitalisations rising
in Indiana, Nevada, Ohio, Virginia, and Wisconsin.

New
lockdowns as cases spread elsewhere?

Outside the US, cases continued to surge in
parts of western Europe and north and Pacific Asia. In Spain, cases rose to above 2 700 for the past seven days. Germany and France reported a steady rise, as did Belgium and the Netherlands,
although from a lower base. The resurgence appears to be fuelled in part by
young people ignoring social-distancing rules and flocking to beaches and bars.

Note that Belgium already tightened
measures locally last week in response. It looks like the rest of Europe could
be tested with the second round of lockdowns as people are returning from
holidays, schools are about to open and the weather changes.

Japan’s second wave now dwarfs the peak seen in April with 1 400 new
daily cases nationwide. Similarly, Australia’s
cases have surpassed the March peak, prompting the state of Victoria to declare
a ‘State of Disaster’, introducing a nightly curfew and banning virtually all
trips outdoors.

Vietnam, the poster child of North Asia in keeping the virus under control,
reported its first three deaths as new cases rose to above 30.

The bottom line: current trends from
around the world appear to be showing what happens when suppression measures
are relaxed – especially in countries that actually managed to control the
virus. It reminds us that containing the virus requires early proactive and
reactive measures such as extensive testing and surveillance tracing, while
practising self-quarantine, social distancing and closing venues that might
contribute to mass-spreading. Indeed, England’s chief medical officer said
the easing of restrictions had “probably reached near the limit”
if the virus was to be controlled.

Economic data – Improvements and trepidation

In the US, markets are focusing on this
week’s July labour market data. It should shed light on the strength of the
recovery and the extent to which rising COVID-19 risk is holding back
employers. Indeed, higher frequency indicators such as restaurant bookings,
petrol demand and population mobility have already pointed to activity in
certain services sectors stalling or even reversing.

The data could influence businesses’
hiring strategies, consumer confidence, voters’ moods and policymakers’
actions. As for the latter, lawmakers have struggled to hammer out a new
stimulus plan, with extra jobless benefits and aid to cities and states seen as
areas of contention. There is concern that the economy is in peril now that the
supplemental jobless payments have expired.

Jobless claims have risen recently,
indicating workers are staying longer on unemployment rolls and that rehiring
has slowed. Federal Reserve (Fed) Chairman Powell said the labour market “has a
long way to go to recover”. The Fed warned a resurgence of the virus threatened
the economic recovery as it held rates near zero and extended measures to deal
with a risk of an international shortage of US dollars.

Global purchasing managers (PMI) data
continued to improve, led by a stronger recovery in manufacturing output in
developed markets, while the recovery in emerging markets still lagged. Given
the recent resurgence in the COVID-19 cases globally, there is still much
uncertainty as to whether the recovery in the sentiment surveys will translate
into more demand and investment.

Markets
– Gold continues to shine

US stocks saw a rally in the tech sector,
which ran aground amid concerns that the run-up had gone too far, while news of
the Fed’s measures on US dollar liquidity and a return of M&A deals
provided support to the wider market. Downside pressure emerged as president
Trump floated the idea of delaying the 2020 elections and amid news of a grim
second-quarter contraction in US GDP. Global stocks piggybacked on upbeat
earnings reports and positive economic data, but the rally soon stalled.

Yields fell as bond investors signalled concern over the outlook for the US and other major economies, even though equity investors appeared less worried. Flagging stimulus talks in the US clouded the Treasury market, as did the Fed’s comments (see above) which appeared to indicate a need for more central bank support.

Stimulus-related inflation concerns, falling Treasury yields and the COVID-19 induced worries over the global economic outlook helped push gold to a record high above USD 2 000. The yellow metal benefited from its safe haven status and the search for an alternative store of value to the US dollar and government bonds.

Massive virus-related spending, political uncertainty in the US, growing strains in Sino-US relations and the possibility of a darker economic outlook for the US, and by extension for the world, drove the US dollar to a multi-year low (see Exhibit 1).

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.

Writen by Marina Chernyak. The post Weekly investment update – 5 August 2020 appeared first on Investors’ Corner – The official blog of BNP Paribas Asset Management.