What has happened
With a late rally in the US on Tuesday, the second quarter finished with the best return in US markets since 1998, rising over 18% in the quarter alone. This of course comes after the worst quarter since the financial crisis but is a remarkable reminder of the round-trip financial markets have taken in a relatively short timeframe.
Fatalities remain the key metric
The latest COVID-19 news from the US was not encouraging with Florida and Arizona seeing sizeable increases in new case growth as the weekend reporting lag caught up. Arizona is taking steps to impose lockdowns on some higher risk facilities (e.g. bars, gyms) which is expected to help slow the virus however. Whilst US new case growth remains elevated, this is still yet to follow through to significantly higher fatalities. This suggests that either the healthcare system is getting better at dealing with COVID-19, or the demographics of those being infected is changing. The truth probably lies in a combination of these factors, but if fatalities remain under broad control this gives US States far more flexibility in the balance between the human and economic cost.
Central banks recognise the recovery
There have been signs on both sides of the Atlantic that central bankers have been positively surprised by the speed of the economic recovery. Jerome Powell spoke at the House Financial Services Committee yesterday and noted that the return of economic activity occurred “sooner than expected.” There was a note of caution that normality was predicated on consumers feeling comfortable enough to return to their old patterns of activity. This is clearly a big question mark until a vaccine is found as there will be some degree of social distancing in place either formally or via consumer caution as long as the virus remains in circulation. Bank of England chief economist Andy Haldane said yesterday that “positive news on demand has, in my opinion, more than counterbalanced the rise in downside risks to employment.” Markets will be watching this sort of rhetoric closely as if it implies central banks are less keen to keep increasing quantitative easing programmes this could remove a downside floor to markets.
What does Brooks Macdonald think
If we see a pick up in US fatalities sentiment could turn quickly and cause a re-rating of risk assets. Equally if the US is able to keep the economy largely open whilst still keeping hotspots under control, the markets should continue the Q2 rally. We expect June’s two-way market to continue into July given the ongoing tug of war between these factors.