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Tuesday, May 26, 2020

May 26, 2020
People wear masks as they wait for a bus in Los Angeles on May 14, 2020. Leaving home in Los Angeles now requires bringing a face covering. image AP

Traders can’t seem to make up their mind this week. The Dow industrials DJIA, -0.03% fell 516 points on Wednesday and rose 377 points on Thursday. Say what you will about Federal Reserve Chairman Jerome Powell’s testimony or the latest jobless claims data, neither can honestly be characterized as a surprise, so what the market is really doing is trying to grapple with the uncertainty of the coronavirus pandemic and when economies will rebound.
Didier Saint-Georges, member of the strategic investment committee at French asset manager Carmignac, says his firm expects what he calls the Japanese path — “low growth, low interest rates forever, ample liquidity supply, in which case equity indices may trade sideways, but high quality growth stocks keep outperforming.” The risk is that of a prolonged recession that even aggressive central banks will struggle to fight, he adds.

For those looking beyond the next few days, Bank of America has released its view of what the world will look like after the COVID-19 upheaval. “We expect this pandemic to accelerate many macro trends that would have taken five or more years to play out before, from peak globalization, to renewed tech wars and a reappraisal of health-care systems and government influence,” it says.

It sees the rising tensions between east and west, with a third of its analysts now expecting the companies they cover to push for supply chain reshoring. A second theme is the race for tech supremacy, with half of its analysts expecting higher IT spending, and a wave of moonshot investment.

Big Government will be back in a big way. “COVID-19 has handed governments a new social mandate to protect their citizens. Governments will exert greater influence on businesses with shareholder supremacy potentially eroding in favor of stakeholders,” it says.
Stimulus enacted by governments during the crisis.

A fourth theme is that public health will be viewed as national wealth. “COVID-19 will amplify the importance of health care and its social role and accelerate other pressing global public health issues such as drug pricing, antibiotics resistance, future pandemics prevention, [and] universal vaccines for all,” the bank says.

The Generation Z cohort will be “uniquely prepared” for the new era of social distancing, online and sustainability. By contrast, millennials — hit by the “double downgrade” of graduating into the financial crisis and then being hit by COVID-19 — are “most exposed to earning cuts.”

Another possibility — after the crisis is over, is a baby boom: “as seen after many famines, earthquakes, and disease outbreaks.”

The buzz
The U.S. is blocking shipments of microchips to Chinese telecom equipment maker Huawei, according to a Reuters report that sent stock futures lower. Taiwan Semiconductor Manufacturing TSM, -1.87% said it would spend $12 billion to build a chip factory in Arizona, as U.S. concerns grow about dependence on Asia for the critical technology.

U.S. retail sales tumbled a record 16.4% in April, the government reported, as the New York Fed’s Empire State manufacturing index improved to -48.5 for May.

Data from China was mixed, with industrial production rising 3.9% in the 12 months ending April but retail sales sliding 7.5%. Germany entered recession after reporting gross domestic product contracted by 2.2% in the first quarter.

The market
U.S. stock futures ES00, 1.19% YM00, 1.13% turned lower on the concerns over U.S.-China tensions, with the Dow industrials retreating by around 250 points.

Oil futures CL.1, 2.53% extended Thursday’s gains.

The chart

The good news, say strategists at Barclays, is that the gradual reopenings in Europe so far haven't resulted in a second wave of COVID-19 infections. “Dataflow remains dire, there are still many uncertainties about the evolution of the COVID-19 crisis and the old U.S.-China tensions have resurfaced. Yet, we remain of the view that consolidation phases should be used as opportunities to increase equity exposure selectively, as we are likely past the worst. Policy backstop and bearish positioning limit the odds of another meltdown, in our view, while the economy seems to be bottoming out,” they said.

Random reads

Former Vice President Joe Biden says Americans shouldn’t vote for him if they believe the sexual-assault allegations made by former staffer Tara Reade.

The queues were long for mainland China’s first Popeyes restaurant, the first of 1,500 stores planned.


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