Hopes for an EU recovery fund and a bounce in PMI data have boosted risk markets. One of our regular writers, Dominique Dwor-Frecaut, has been on this optimistic trend for a while now. In her latest note, she lays out why a V-shaped recovery in the US is more likely than a U-shaped one.
Turning to Big Tech, strategist John Tierney adds a dose of realism to the relentless rally, identifying potential tax and regulatory changes that could stand in the way of continued outperformance in the post-COVID world.
We also feature an article from Natalie Cohen, president of National Municipal Research and publisher of thepublicpurse.com. She highlights three weak links in the US economy, namely; retirement security, infrastructure and climate change and the potential for one of these to boil over.
Away from the US, Caroline Grady delves into the UK balance of payments data, highlighting risks from the changing composition between goods and services and the impact of worsening public finances.
Finally, we update our daily COVID tracker.
U And V Shaped Risks Compared (3 min read) In this note I list my top three risks of V (fast) and U (slow) shaped recoveries. On balance, V seems more probable, mainly due to the US electoral calendar.
Risk #1: The November elections generate ‘whatever it takes’ policy support. The scale of monetary and fiscal relief is unprecedented. Yet the administration has other levers it could use, for instance a broader debt moratorium or central bank digital money to ensure the economy is recovering ahead of the elections…
(Dominique Dwor-Frecaut | 21st May, 2020)
The Tech Aristocracy – Too Good To Be True? (8 min read) Its been the no-brainer stock trade of the decade – buy and hold the tech aristocracy often referred to as FAMAG (that’s Facebook, Apple, Microsoft, Amazon, and Google). They have outperformed the S&P 500 by 155% since 2013. Their share of the SPX in market cap terms has swelled from less than 9% to 22% in the past seven years, with a fifth of that gain coming since October 2019.
(John Tierney | 21st May, 2020)
Which Frog Will Boil First? (9 min read) As the parable goes, drop a frog into a pot of boiling water and it’ll jump straight out. Put it into tepid water and slowly bring it to the boil and the frog won’t notice until it’s cooked to death. Right now, I see at least three frogs in pots of different temperatures: retirement security, infrastructure and climate change. These are critical issues that take a long time to reach breaking point. We know they are there. We talk and research and disagree and write about them year after year, yet still we sit in the pot of water.
We have great difficulty coming to the table to find solutions. We fail to hold our leaders accountable to make changes before it’s too late. In the worst case, we permanently damage the systems that sustain us; in the best case, we punt these problems down to the next generation…
(Natalie Cohen | 21st May, 2020)
The UK, COVID And The C/A Deficit (3 min read) Fiscal expansion in response to COVID and the forthcoming spike in debt have dominated investor concerns in recent months. But these significantly larger fiscal deficits will also have implications for external balances as the gap between government savings and investment shifts. For the UK, where the current account (C/A) has been in deficit for almost four decades and which heading into the current crisis was one of the largest globally, this is worrying. A wider deficit from here could raise significant concerns over financing, particularly with the future relationship with the EU remaining uncertain…
(Caroline Grady | 21st May, 2020)
Global COVID-19 Tracker In the DM world, no country sees an increase in cases or deaths larger than 2%. In EM, Chile leads with an 8% increase in cases, followed by Brazil with 7%. As of deaths, Chile and Mexico saw a 7% jump. Clearly, Latin America remains the epicentre of COVID at the moment. Despite this, Mexico announced restrictions easing. Elsewhere, South Africa saw a 9% jump in deaths.
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