Markets focus on the positives


by Chief Investment Office 06 Jul 2020

Thought of the day

COVID-19 infection rates continued to rise over the weekend in the US, with the seven-day average of daily cases reaching a new high for the 27th consecutive day. The trend has been causing local and state officials to warn about limits to healthcare capacity. The mayor of Austin, Texas, warned that the city’s hospitals would be “overrun” within two weeks if the recent trend continues. The uptick in infections is posing a threat to consumer sentiment, with data from SafeGraph showing traffic at retail stores and restaurants falling since the middle of June, after it had started to recover in April and May. Online restaurant booking service OpenTable also registered a fall in sit-down dining at the end of June. Meanwhile, a spike in infections in Australia has prompted fresh restrictions on movement. The border between Australia's two most populous states, Victoria and New South Wales, will close after a rise in COVID-19 cases in the city of Melbourne.

But investors have continued to focus on the positives, with global equity markets gaining on Monday. China's CSI 300 index climbed 5.7% in the largest daily advance since 2015, the Euro Stoxx 50 traded 1.8% higher, and S&P 500 futures advanced 1.2%. While we expect continued volatility, we think there are grounds for optimism that economies and markets can weather the recent acceleration in infections.

  1. There are signs that healthcare systems are coping better with COVID-19, reducing the need for restrictions on freedom of movement. Fatalities have been rising more slowly than infections, even allowing for a lag. While infections in the US increased by an average of 1.7% over the weekend, fatalities increased on average by just 0.2%, in contrast to an average of 0.6% in the five days prior. Investors have also been encouraged by medical advances both in treatment and in vaccines. The European Commission recently provided conditional marketing authorization for Gilead Sciences’ remdesivir, which has shown evidence of effectiveness. Thirteen vaccines are also currently in human trials, and recent news has been encouraging. A COVID-19 vaccine developed by German biotech firm BioNTech and US pharmaceutical giant Pfizer has shown promise in early-stage human trials, the companies said on 1 July. And a vaccine being developed by Inovio Pharmaceuticals induced an immune response in 34 of 36 healthy volunteers, according to data released earlier last week.
  2. Central banks and governments remain committed to large scale stimulus. Republicans and Democrats in the US Congress are increasingly convinced of the need for further economic support, according to a report late last week in the New York Times, adding to USD 3tr of measures announced in March. Congress last week unanimously agreed to extend an aid program for small businesses through August. Injections of liquidity are continuing from central banks, supporting risk assets, led by a USD 3tr increase in the Federal Reserve's balance sheet since the start of the pandemic.
  3. Economic data continues to point to resilience. German industrial orders rose 10.4% in May, missing forecasts but suggesting stabilization after a steep fall in April. Economic data from the US has been consistently topping expectations, with the Citi Economic Surprise Index rising to 188, a record high from a low of –144 in April. Last week's US non-farm showed payrolls rising 4.8 million in June, beating forecasts for 3.23 million, while the previous month’s data was revised up to reflect a gain of 2.7 million jobs. This resulted in the June unemployment rate declining for a second consecutive month to 11.1%, from 13.3% in May.

With news on the pandemic moving fast, we advise investors to brace for continued high levels of volatility. This can be a blessing, as well as a curse. For those who can implement options, put-writing returns can be especially high at times of elevated implied volatility. For more on taking advantage of volatility, click here. Given the grounds for optimism, we also think investors should position for the upside. For more on such strategies, click here.

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