Markets have resumed their upward momentum as the gradual easing of lockdown restrictions increases optimism over the recovery. But not all countries are out of the woods yet. We feature an article on Brazil where Bolsonaro’s denial of COVID leaves concerns that much worse could be ahead. We also feature a related article on the trade-off between mobility and infections rates in poorer countries.
On macro, VoxEU looks at what the post-COVID spike in public debt mean for future growth and it’s not good. George Soros joins the debate on what COVID means for China’s future influence in global affairs while Mohamed El-Erian reminds us that de-globalization is here to stay.
Turning to markets we feature PIMCO on opportunities in corporate bonds.
We also feature an Exclusive from Dominique Dwor-Frecaut and George Goncalves on why Powell is likely to retain his ambiguous stance on negative rates during his speech on Wednesday. Finally, we update our daily COVID tracker.
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Markets have resumed their upward momentum as the gradual easing of lockdown restrictions increases optimism over the recovery. But not all countries are out of the woods yet. We feature an article on Brazil where Bolsonaro’s denial of COVID leaves concerns that much worse could be ahead. We also feature a related article on the trade-off between mobility and infections rates in poorer countries.
On macro, VoxEU looks at what the post-COVID spike in public debt mean for future growth and it’s not good. George Soros joins the debate on what COVID means for China’s future influence in global affairs while Mohamed El-Erian reminds us that de-globalization is here to stay.
Turning to markets, we feature PIMCO on opportunities in corporate bonds.
We also feature an Exclusive from Dominique Dwor-Frecaut and George Goncalves on why Powell is likely to retain his ambiguous stance on negative rates during his speech on Wednesday. Finally, we update our daily COVID tracker.
Enjoy!
Bilal
The Fed’s Constructive Negative Rates Ambiguity (4 min read) Several Fed Funds futures contracts began pricing above 100 last week, implying that markets were pricing in a small negative Fed Funds rate in the not so distant future. Here, we discuss why we expect Chair Powell to maintain a “constructive ambiguity” on negative rates in his speech on 13 May, and we explore the potential market drivers and implications…
(Dominique Dwor-Frecaut, George Goncalves | 12th May, 2020)
Global COVID-19 Tracker There were no major changes in the DM world. However, in EM, Russia, South Africa, and Nigeria saw a 6% increase in cases. While Taiwan saw a big jump in deaths (17% from a low base).
As for where countries are in terms of peak waves – we look at it in two ways. One in terms of levels of daily cases/deaths and the other in terms of changes in daily cases/deaths…
(Bilal Hafeez, Stefan Posea | 12th May, 2020)
A contrarian view on the airline industry, and PIMCO’s outlook for Fixed Income
Why Buffett Was Wrong to Dump Airlines (Advisor Perspectives, 3 min read) Historically, air travel has proved resilient to external shocks ranging from the Oil Crisis to 9/11 and SARS. The number of daily US commercial air passenger has also begun to recover slowly from its lows as the lockdown eases (we are past the bottom). Q1 of 2020 also saw record inflows into airline stocks from value investors.
Low-Interest Rates and the Outlook for Fixed Income (PIMCO, 3 min watch) PIMCO Group CIO Dan Ivascyn believes that in the short run interest rates will remain low and range-bound. He thinks there are attractive opportunities in the corporate segment (both public and private markets) where there are attractive yields and higher total returns.
The 5 Types of Investors in This Market (A Wealth of Common Sense, 4 min read) A combination of the following investors are driving the current sentiment; i) Tech, long only, ii) Non-participants in the market (due to the disconnect between the market and the economy) iii) Long only investors, iv) Tail risk strategies and stocks that are benefiting from lockdowns (Peloton, Zoom, Slack, Netflix), v) Those uncertain about portfolio allocation.
A case on how the current decline in real yields is toxic for the economy, and how current CB action is not a helicopter drop
Helicopters to the Rescue? (Money and Banking, 8 min read) Euro area and US central bankers are not resorting to helicopter money. Policymakers have retained monetary control and are still independent (they decide what, when, and how much to buy).
The Decline and Fall of Real Yields… Again (The Capital Spectator, 5 min read) Inflation-adjusted interest rates in the US have been negative before (i.e. in 1970). But this time the situation is complicated by a global economic collapse with a lot of uncertainty. The most significant risk posed by negative real rates is deflation which, accompanied by rising debt level, is ‘toxic.’
How debt is detrimental for economic growth, and how social distancing may be unfeasible for poorer countries
Growth in the shadow of COVID-19 debt (VoxEU, 9 min read) A spike in the debt-to-GDP ratios leads to a sharp contraction in GDP growth (for both developing and developed economies). The massive fiscal expenditure seen during COVID could therefore come at a cost: lower growth in the medium run.
Brazil’s Pandemic is Just Beginning (The Atlantic, 7 min read) Brazil could become the next epicentre for COVID as fatalities quickly increase thanks to a weak public health system and crowded neighbourhoods. This could exacerbate current income inequality, poverty, and potentially cause an economic breakdown (since Brazil was recovering from a recession pre-COVID).
The value of social distancing is not equally distributed (VoxEU, 9 min read) Lockdown is less feasible in poorer countries. It is estimated that the advantages of social distancing and suppression policies are different across countries. Countries with younger demographics are less susceptible to the disease and less eager to trade-off economic wellbeing for risk reduction.
The shape of the US recovery, and how COVID 19 hinders labour reallocation
The Cost of the Covid-19 Crisis: Lockdowns, Macroeconomic Expectations, and Consumer Spending (NBER, 19 page read) A survey with a sample size of 10,000 finds that households residing in countries that imposed lockdown sooner expect the unemployment rate to be 13pp higher over the coming year, with the impact still felt up to five years from now. These participants were also inclined to close positions of foreign equities and have liquid savings.
COVID-19 is also a Reallocation Shock (NBER, 27 page read) 42% of all recent layoffs will be permanent. Current unemployment benefits offered (in cases exceeding prior worker earnings), policies to subsidise employee retention, occupational licensing restrictions, and regulatory barriers will all hinder the economy’s return to its original capacity.
What is the Shape of This Cycle as a Letter: V, L, W, J, U, or Maybe a Lazy J or Wiggly W? (Angry Bear, 5 min read) If there is a second wave of cases, recovery in the US could follow a “Wiggly W”, where, unlike the neat W, the downturn is asymmetric, and the upturn is much slower. But the most likely scenario is a “Lazy J” where there is a sharp downturn but (unlike the shape J) the recovery is prolonged (a bit like a Nike Swoosh).
How coronavirus will affect Turkey in the long run and George Soros’ take on the pandemic
The Crisis of a Lifetime (Project Syndicate, 11 min read) George Soros believes President Xi Jinping’s power in China will decline due to the handling of the crisis. He is also sceptical on the EU’s survival. He proposes that the EU should issue Consols (perpetual bonds) since that was successful historically and it would sidestep the legal issue currently posed at the ECB (due to the German court ruling).
Navigating Deglobalization (Project Syndicate, 6 min read) Mohamed A. El-Erian is confident that gradual de-globalization is on the cards. He believes the main drivers are national security interests (having access to strategically necessary inputs without relying on other countries) and the US-China blame game worsening the overall geopolitical landscape. His advice? Focus on minimizing the disruption rather than fighting against de-globalization.
The coronavirus has led to more authoritarianism for Turkey (Brookings, 8 min read) Like many countries, COVID forced Turkey to face a dilemma: save the economy or save lives. Since Turkey is subject to authoritarian governance, it’s recovery will be slow, with long-term damage inflicted on its institutions, democracy, the rule of law, and economic development.
Quantifying macro risk factors for currencies, and how the trade war impacted investments in the US
The Effect of the U.S.-China Trade War on US Investment (NBER, 31-page read) US-China tariff movements between 2018 and 2019 will reduce the investment growth of listed US companies by 1.9pp by the end of 2020 primarily via the stock market channel. Lower stock market returns lower the return to capital and, as a result, the investment rate.
Attention to the tail(s): global financial conditions and exchange rate risks (ECB, 20 pages) Currency portfolios classified on the basis of macro risk factors (i.e. current account balance) had a higher likelihood of substantial losses in response to a tightening of global financial conditions (rising interest rate).
China-Russia relationship during the crisis, and why renminbi won’t challenge the dollar
The Dollar-Renminbi Conundrum (OMFIF, 3 min read) Renminbi won’t replace dollar anytime soon. The volatility caused by it will be detrimental for China. China is gradually liberalising and opening up to the world, and renminbi as an anchor right now would be impractical.
China and Russia Must Work Together to Defeat Covid-19, Xi Jinping Tells Vladimir Putin (South China Morning Post, 5 min read) Russia is standing firmly with China amid escalating political tension with the West over the handling and origins of the virus.
Tech outperformance on ESG metrics, and which stocks are being excluded from a popular ESG index
Some Big Names Added, Dropped from a Popular ESG Index (ETF Trends, 2 min read) The S&P 500 ESG Index is one of the strictest ESG benchmarks. And it has dropped the following names: Clorox, Twitter, Equifax, Ford Motor Company, ViacomCBS, Nordstrom, Southwest Airlines and Walmart. On the other hand, Costco, Facebook and Wells Fargo were added back due to improvements in their ESG scores.
Why Tech Funds Score Highly on Sustainability (City Wire, 4 min read) The best ESG rated funds are tech overweight. The tech sector in general battles with privacy and data issues; however, this remains less of a concern relative to the structural viability and systematic risks that other sectors face. For example, the whole energy sector could collapse if the government imposes strict climate change regulation.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)