What has happened?
Markets rose for a third consecutive day as comfort over central bank support was joined by a more positive set of economic and viral headlines. European equities have outperformed over the last few days as investors focus again on the cyclical stocks that have an outsized weighting in their indices.
The good news
A University of Oxford trial showed that a generic steroid was found to reduce fatalities by a third in patients who required ventilation. This has been widely hailed as a significant step forward in the healthcare response to COVID-19 with England’s Chief Medical Officer stating it is ‘the most important trial result for COVID-19 so far’. US Retail Sales were also far stronger than the market expected which, like the US employment report a few weeks ago, suggests a strong rebound in US economic activity. There is of course still the trade off between the economy and the spread of the virus which markets will be watching keenly but in the interim the data is suggesting a shorter U-shaped recovery in the world’s largest economy.
The bad news
Whilst the aforementioned good news won out against the more negative headlines, second wave risks have not gone away. Beijing yesterday announced the closure of schools and further restrictions on travel as the city attempts to curb the uptick in viral outbreaks in the city. China has escalated lockdowns rapidly in response to case numbers and this stands in contrast to the US which has been slower to respond. The four hotspot US states saw a further rise in new cases with Florida rising by 3.6%. Whilst these numbers may appear to be relatively contained in percentage terms given the high base these are the highest absolute numbers since the pandemic began
What does Brooks Macdonald think
The reassurance of central bank support has allowed equities to shrug off the second wave fears which initially catalysed the sell-off last week. The University of Oxford trial should be supportive of risk assets as it helps reduce the trade-off of reopening economies sooner rather than later. The fact that the steroid is a generic means it costs healthcare systems relatively little to acquire. This allows the drug to be particularly useful in developing world countries which in many cases are far earlier on the epidemiological curve than Western Europe.