Rabobank: Suddenly The Virus Matters Again

Submitted by Michael Every of Rabobank

Suddenly the virus matters again. Or so it would seem, with stock markets discovering that, yes, they too can go down – as US infection numbers continue to go up and up. True, so far the mortality rates are remaining far lower in places like Texas than they were in New York – but reports underline that if you catch Covid-19 and recover it can still mean long-lasting or perhaps permanent lung or neurological damage: this is still NOT a ‘flu. The Fed’s Evans concurs that opening up too fast can worsen new spikes in infections. Indeed, while there is an obvious imperative to try to get back to normal, if the virus itself becomes normal within the population then there will never be a return to previous economic normalcy. We are all still hanging our hopes on a vaccine, which is where we have been since day one.

Let’s see how the UK fares as it is about to bravely re-open on 4 July with a 1-metre rule. That’s odd symbolism given it is a Sunday, so 3 July would have been more logical – but then when has logic played much of a role in anything on the UK Covid front so far? Indeed, the much-heralded 1-metre rule also doesn’t mean much: Bloomberg quotes a restaurant owner today saying they will still struggle to make any money with that kind of gap between seats as covers will fall from 30 to 18, or 25 at best if they invest in new tables. This has been blindingly obvious to some of us for some time. Of course, with a mini-heatwave yesterday seeing British beaches packed like sardines with young revellers ignoring social-distancing rules, why are we worrying about 1 metre at all? One wonders what the virus infection numbers will look like a week or two from now.

In the US, New York, New Jersey, and Connecticut are telling visitors from states with high infection rates to self-quarantine for 14 days if they come to visit – which means no business travel is possible. And for a real US bellwether, Disneyland is delaying its scheduled 17 July re-opening with no new date clear so far. A case of “Catch and Mouse”.

In Europe things do not seem set for a normal sunny summer, meaning that the slew of businesses which rely on those summer Euros are likely to be without any cash buffer for a long, lean winter; indeed, France’s Macron is now outlining a plan for the state to cover much of the cost of a furloughed worker for as long as two years, if needed.

The IMF underline that with escalating global infections, signs that opening up is then followed by repeated partial lock-downs, and voluntary ones from consumers, the growth outlook is even worse than it was a few months ago – not better. Global growth is seen a staggering -4.9% y/y in 2020, down from -3% expected back in April when the virus was at its peak in Europe and the UK. Growth is also now only seen bouncing 5.4% in 2021, down from 5.8% – which means basically little increase in output over the two-year period. Moreover, the likelihood is that from 2022 onwards we then see retain a very weak growth backdrop due to a legacy of higher unemployment, debt, and what may be permanent structural changes to the economy.

That rare risk-off backdrop sees the USD more on the front foot and bond yields lower to match stocks. Will it last? I am sure a central banker somewhere will say something reassuring that will see markets continue on in their own sweet path as we all slide into Japanification and de facto central planning without a plan. Yet some people do have a plan – and it is not one markets will like much:

• The US will impose USD3.1bn of tariffs on EU exports, including yoghurt, cheese (oh, the humanity!), olives, and aircraft: we can naturally expect an EU response in kind.
• India plans to impose “stringent quality control measures” (i.e., non-tariff barriers) and higher tariffs on Chinese exports of chemicals, steel, consumer electronics, heavy machinery, furniture, paper, industrial machinery, rubber articles, glass, metal, pharma, and fertilizers. They forgot the kitchen sink – unless that is included and I missed it. India is for the moment heavily reliant on said imports – but with the right incentives it can be cost-effective to produce at home, or buy from others. Chinese shipments are already being held up for extra inspection, says Reuters.
• The Pentagon has just produced a list of 20 Chinese firms that it says work with the Chinese military and hence need to be subject to restrictions – including Huawei. The pushback on that tech front is seeing significant successes: Singapore has just opted not to use Huawei for its 5G network, following key Western economies – and now India too.

Perhaps the only positive for markets in terms of geopolitics is that the White House has asked a China hawk to delay legislation with strong bipartisan backing in Congress, which would impose mandatory sanctions on individuals, firms, and *banks* on China over its treatment of Hong Kong. The administration wants to make “technical” corrections to the bill before it passes. Does this mean the US is blinking and won’t use the USD ‘nuclear option’? Possibly. At the same time, if the bill passes the US has NO option other than that nuke. This is still a key development to monitor – and within days said Hong Kong national security legislation will be passed in Beijing. It’s all going to remain very cat and mouse.