As we start this week, we also start a new month and it looks like May’s sunny rays have continued into June, but we see clouds on the horizon…
But that’s certainly not the consensus view – investors are looking at their monthly performance and have a smile on their face. The S&P 500 was up by over 7% in May, the NASDAQ up over 10%. Europe underperformed – nothing new there – but still managed to rally 5% or so depending in the market. The FTSE managed a very credible 7%, helped by higher oil prices and a weaker sterling. Sterling is a ‘risk on’ currency and the UK is still a pretty big oil producer so the fact that it went down against the USD and the euro in the month reflected worries over Brexit and the comings and goings of the PM’s chief adviser. Political risk also explains why the Hang Seng was one of the few markets to record a loss in May.
Markets have been remarkably resilient…
Markets are remarkably resilient. Despite the worst race riots in the US for 50 years and renewed tensions between Trump and China, the rally continued last week and there was even a long-awaited rotation into value, Europe, and banks, even tech underperformed.
The key drivers are the absence – so far – of second waves from the easing of lockdowns and expectations that the Oxford Jenner Institutes vaccine will be available in the hundreds of millions by Christmas.
…but have they priced in too much good news?
I’ve taken a generally bullish stance since late March, and we remain overweight equities and credit. But I’m a bit concerned that there’s too much good news priced in. I fear that we will see second waves of infections in Europe and the US and I’m nervous that any negative headlines on the Oxford vaccine will be very damaging.
Let’s start with the optimism about second waves, or rather their absence. This is partly based on the experience of China, which is a couple of months ahead of the US and Europe. Many sectors in China such as autos, construction and manufacturing have had V-shaped recoveries, and the trend in many areas of the hard-hit service sector is steadily upwards. But we must remember the major difference – China started easing their lockdown when new infections were close to zero, Europe and the US are easing theirs when cases are much higher.
The success of test, trace and isolate is key
South Korea is a good example of how things can go very well and how they might go badly. They’ve done incredibly well in the crisis. Their curve of infections was steeper than in Europe and the US but they manged to flatten it at much lower numbers. That owed much to their test, track, trace and isolate strategy. Once a new infection was identified, extraordinary efforts were made to find all those who the infected person might have been in contact with. The cluster of cases linked to a Seoul party district is an exception. Most bars and clubs have entry logs as a requirement, but many in the district were found to be inaccurate, putting an estimated two-thirds of party-goers now out of reach.
The reason for discussing this is that the test, trace and isolate programmes in Europe and the US will be more like the Seoul party district than the rest of Korea. We don’t have the app, our governments won’t be using CCTV or credit card data, nor any download info from smart phones, as our citizens are generally regarded as less willing to cooperate with the authorities. The comings and goings of the PM’s special adviser don’t help, and the US was in a much worse position even before the recent riots.
New waves could cloud optimism
If any new second waves hit the headlines, markets may suffer. Much depends on the results from the first human trials of the Oxford vaccine due out in the next couple of weeks.
As well as watching for virus news, we also have the European Central Bank meeting this week, the UK Chancellor’s big summer fiscal package, and we get the US employment figures on Friday.
Enjoy the relaxed lockdown if you can but stay safe and stay alert – whatever that means.