A second wave of infections in the US ‘sun belt’
Regarding the virus, let’s start the with the US, where the number of new cases continues to rise. This is a genuine second wave – the only major country where this has occurred, so far; new cases were slowly declining and have now exceeded the April peak. It’s all dominated by the ‘sun belt’ states. The states where the first wave was focused, namely New York, New Jersey and Connecticut, seem to have the virus under control. It’s not all bad news though. Fatalities in the sun belt have remained low and although some increase seems inevitable over the next few weeks, the rate of hospitalisation is likely to remain relatively low, meaning that the risk of healthcare systems in these states should avoid the sort of pressures seen in New York.
The authorities in the sun belt states imposed weak lockdowns and eased early, but citizens have taken matters into their own hands. The new cases are dominated by younger people who have decided to enjoy socialising, the vulnerable and older citizens have been much more cautious. The median age of new cases in Florida for example was 60 back in April. It is now 30.
All of this has an important political dimension. The worst-affected states are predominantly Republican, and the President himself has not performed well in the epidemic. The betting markets have moved further to price in a Democratic ‘clean sweep’.
Mixed success outside of the US
The situation remains grim in key emerging markets, notably Brazil, South Africa and India. It’s very different in China and South Korea, where localised outbreaks have been swiftly brought under control, new cases are low and fatalities even lower. Europe is also doing well and Germany is on top of its localised cluster. As the UK lockdown exit gathers pace, the numbers are improving here too, but the rate of decline has slowed. The coming weeks will be key in seeing how we cope with our inevitable clusters.
Economic forecasts still too pessimistic
As for the economic impact of this, there are some very interesting trends. Forecasts for growth this year are still being revised down, though the curve is flattening. By contrast, economic data is coming in massively stronger than expected led, ironically, by the US. So I expect some of those growth forecasts to be revised up.
That should also feed through to better earnings numbers and support stock markets. That does depend on the sun belt getting on top of the virus but I’ve been running some numbers, and if they merely delay their recover by a few months, it won’t be too bad at all at the aggregate level.
Equity markets lower despite continued support
Meanwhile, financial conditions remain extraordinarily supportive. Government bond yields fell further last week and the ‘risk free’ rate – the yield on 10-year US inflation protected securities – plumbed new depths at -70 basis points. After a disappointing week of performance, most equity markets are lower than a week ago. The US underperformed Europe but remains well ahead year-to-date.
If the virus trends continue as I expect, risk assets will recover from last week’s swoon. The challenge will be the much feared second waves in the autumn for the northern hemisphere and the risk of widespread bankruptcies as the extraordinary forbearances by banks and government support fades.
All in all, I remain optimistic but it’s clear that the outlook will continue to be volatile and overall returns look set to be modest.