22 June - update from our investment partner
- 22nd June 2020
What has happened
Markets are still wrestling between the pickup in US new case growth and the economic data which suggests economies are restarting. This uncertainty led to a late sell-off in the US on Friday and this weakness has continued into the Asian and European sessions today.
Viral Pick Up
The US saw daily case growth of 1.5% over the course of last week, higher than the 1.2% for previous week. The R transmission rate in Germany was also estimated at 1.79 over the weekend. This is a dramatic pick up but it should be remembered that this is from a low base and whilst the absolute numbers have increased rapidly they do appear to be localised in a meat packing plant. Meanwhile Beijing appears to have brought the second wave in the city under control with just 9 cases reported overnight. Expect the elongation of the first wave and second wave fears to continue to dominate markets this week.
Most unloved rally
This pick up in viral spread has made the unloved equity market rally even less popular with positioning data from Deutsche Bank showing that a vast swathe of investors are sitting on the side-lines during the rally. This has historically been a contrarian indicator and led to strong equity market gains as investors feel the fear of missing out. Another metric we watch closely is the quantity of cash in Money Market Funds, in the US this is now over $5 trillion at the end of May, around a quarter of US GDP in 2019. Should there be any re-allocation, either at a corporate level through buybacks or M&A activity, or investors rotating away from cash, this could be strongly positive for the balance between demand and supply across risk assets.
What does Brooks Macdonald think
After the one-way optimism of April and May, risk assets are more evenly poised as we come to the end of the second quarter. Whilst liquidity has reduced the cost of being patient, increasing the value of equities, it cannot in and of itself prevent second wave risks from surfacing. It is becoming increasingly clear that the trade-off of a return to more economic normality will be these occasional spike ups of new case growth and subsequent revaluation of equity levels. That said, with cash on the side-lines and ultra-low government bond yields, the environment should remain positive for equities.
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