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Global infection growth slowed from 20% W/W to 16% W/W last fortnight (total infections: 4,443,986, deaths: 302,468, 6.8% mortality rate). And as the rate of new infections is slowing, concerns emerge about a second wave of the coronavirus pandemic.

As JPMorgan’s MW Kim writes, China and South Korea are in the stage of full “recovery” from the first infection curve as 99.9%/ 91% of cumulative infections have been removed from the infection pool.

If we assume that the infection is just one-time outbreak, both countries’ progress in the infection cycle and large relaxation of social distancing should be plausible. However, based on both the bank’s conservative assumptions and epidemiologist observations, a full removal of COVID-19 would be almost impossible until the vaccine is available to the larger public. This suggests that increasing human mobility/ business activities would pose the risk of a second wave outbreak by way of faster transmission rate increase.

As China and Korea are heading toward being first-out of the curve, both countries have relaxed social distancing measures/ city lockdowns in April ahead of European/ ASEAN countries. Unfortunately, over the last 10 days, we are observing growing risk of a second wave in both countries as new infections start to increase. Thus, JPMorgan is now evaluating the risk of a second wave risk in China and South Korea.

Based on JPMorgan’s assessment, Korea looks to be entering into the stage of second wave as new infection growth looks faster and larger scale. Therefore, the bank introduces the second curve forecast into its existing epidemiology modelling in Korea.

Separately, China’s new infection trend post the test outcome of China’s Wuhan city will also be closely watched by JPMorgan. As MW Kim notes, “as we factor this potential risk under the pessimistic scenario in epidemiology modelling in China, should there be a greater number of infections monitored, we would consider plugging this fine-tuning into the pessimistic scenario.” That said, he notes that “the second infection wave could be smaller scale in terms of total infections, mortality rate, and having a shorter period from infection to recovery. This is due to the government having experience from first wave infection management and the public largely being aware of potential infection risks with experience of social distancing.”

China: Rising daily new infections

Daily new local infections in China have started to rise since May 9th. 17/14 new infections were reported on May 9th and 10th and among those, 10/12 cases were local infections and mainly from Ji Lin and Hubei provinces. On May 10th, Shu Lan city of Ji Lin province announced city lockdowns again due to increasing local new infections. On May 11th, Wuhan government announced testing of the full population (~11M) in 10 days. China government’s surprising measures on new infection control may be read as an early wake-up call of the larger-scale second wave possibility instead of pre-emptive control measures.

At this stage, it is almost impossible to forecast the potential size of new infections including asymptomatic cases as current statistics suggest Wuhan is almost a COVID-19 free city through full recovery (based on official data which as has been repeatedly observed, is bogus at best). Therefore, after this large scale test is done, expected outcomes include (1) better understanding of potential infections out of total population post the curve-end; (2) % of immunity groups post one infection curve in the society; and (3) recurrence rate. These should be important statistics globally to gauge the risk of the second wave as many countries are planning to reopen the economy under relaxed social distancing measures

Shu Lan city of Ji Lin province lockdowns from May 10th

On May 7th, one local new infection was reported in Shu Lan city, Ji Lin province after 73 days of no new local infections province wide. On May 9th, 11 new local cases were reported, all in Shu Lan city and three new cases in Ji Lin city on the 10th. The risk level in Shu Lan city was raised from low to medium on the 9th and subsequently raised again from medium to high on the 10th. On May 10th, Shu Lan city government announced a city lockdown with strict control on mobility.

There has been one connected case found in Liao Ning province (a nearby province) that’s related to Shu Lan city’s confirmed case. At this stage, it is uncertain where the origin of the second wave in Ji Lin province came from. As Ji Lin province is located in the northeast of China and borders Russia, it is likely that imported cases have led to spread of the virus in the local community, at least if one believes the official government narrative.

South Korea: Emergence of second infection wave

Korea relieved its strict social distancing measures starting from Apr 20, and relaxed them further on May 6, partially lifting work from home measures, and resuming activities in malls, parks etc. However in the past week, there has been a rise in daily new infections from the previous single-digit new cases per day to ~30 cases per day.

Total infections in the country stood at 11,018, as of May 15, with 260 total deaths. The recent outbreak is expected to add another 2,000 new infection to the curve and this should delay the curve end to mid August from the end of May.

Those cases, according to JPMorgan, “illustrate the risk of a second wave in the process of economic reopening” and “considering the first-in first-out (FIFO) concept of the infection curve, similar experiences perhaps are likely to be replicated in other countries in the recovery stage.”

Authored by Viraj Patel, FX & Global Macro Strategist at Arkera, originally posted by the author’s Medium page.

Over the last 45 years, a typical US dollar trend cycle has lasted around 6 to 7 years — with the Broad Real Dollar index posting an average change of 34% per cycle. Assuming that we’re in the midst of a dollar bull run that started in August 2011 — the current upswing to date has posted a 36% rally and is almost 9 years in duration. So, is the dollar about to peak and embark on a multi-year bear trend?

In short, no — at least not yet. When we look at the cyclical and structural macro conditions that have underpinned major downswings in the dollar since 1975, none of these are currently being met. Instead, the backdrop that is set to prevail in the initial stages of the COVID-19 global economic depression is likely to remain supportive for dollar haven flows.

Characteristics of a Dollar Bear Trend

Taking a deeper look into the factors that have underpinned major cyclical moves in the dollar — we see that bear trends typically show the following 6 common characteristics:

1. A substantial decline in the USD’s relative interest rate advantage — with the dollar always exhibiting negative carry
2. Stronger GDP growth in the Rest of the World (RoW) relative to the US — thus declining US-RoW growth differentials
3. Rising US twin deficits driven by a joint widening of fiscal and current account deficits (bear cycles start 2–3 years after initial widening)
4. High global trade and manufacturing activity (periods of above-trend world trade growth)
5. Money being put to work in RoW assets — driven by relative underperformance of US equities and low market volatility
6. Official US Treasury FX intervention (prior to 2000) — coordinated across major countries with the aim of achieving a weaker dollar

Aside from the Fed’s balance sheet, there’s very little working against the dollar at present. There is too much uncertainty to confidently say whether the RoW will be able to recover from the Global Coronavirus Pandemic materially faster than the US — whilst global trade uncertainty driven by a protectionist US administration is likely to continue weighing on cross-border activity and RoW asset performance for the foreseeable future. The dollar is normally the best place to hide in the FX world when there is this level of uncertainty around in global markets.

If anything, the relationship between the Fed’s balance sheet and the dollar mirrors the 2008/2009 crisis playbook — where the USD continued to strengthen even after the Fed’s initial QE intervention. The broader macro backdrop of a global recession, weak cross-border trade and relative underperformance of RoW assets also lends support to the idea that the dollar will behave in 2020 just like it did in 2008/2009. The main difference, however, is that back then the dollar entered the crisis from a much fundamentally weaker standpoint — the BIS USD REER index was around 15% below its 10-year average in July 2008. In February 2020, the dollar was just over 14% overvalued based on the same measure. This, coupled with the Fed’s relatively more aggressive response, may prove to be a strong limiting factor for how much the dollar can strengthen in the current crisis relative to 2008/2009.

What is needed to set in motion a multi-year dollar bear trend?

If the 6 common characteristics of a USD bear trend are anything to go by — then the next few years would need to see a distinctly different cyclical and structural backdrop for the dollar if it is to experience a 20–30% decline in line with historical bear trends. This would involve: (1) deeply negative US rates and persistently weak US GDP growth relative to the RoW; (2) a wider US current account deficit and above-trend global trade growth; and (3) underperformance of US equities and low market volatility. We explore the likelihood of each of these scenarios unfolding below.

1. Deeply negative US rates and relatively weaker US GDP needed to see a weaker dollar

Whilst the Fed’s aggressive easing actions so far have eliminated the USD’s carry advantage — it may not be enough to see a weaker dollar.

US relative rate differentials against major trading partners have declined around 180bps since Oct 2018. But it’s still not enough to see negative USD carry given the number of developed countries either at the Zero Lower Bound (ZLB) or with Negative Interest Rate Policy (NIRP). The Fed has an impossible task of driving US rates low enough to materially impact the dollar — especially when we’re in midst of a race to the bottom across global central banks. As we’ve seen in New Zealand last week, most developed market central banks are not done easing yet — we should certainly expect more from the ECB, BoE and BoJ in the coming months. On the flip side, we think the Fed will be hesitant to take policy rates below 0% given the market structure in the US and the negative implications for banks and money market funds — meaning we’ve reached a point where US rate differentials (even when adjusted for relative central bank balance sheet expansion) have likely bottomed out for now. If that’s the case, the 180bps adjustment in rate differentials in the last 18 months is not sufficient to trigger a USD bear cycle — the past two major dollar downswings have seen a downward adjustment in relative US rate differentials by around 300bps.

Look for ‘Fed last to hike’ or Yield Curve Control for a weaker dollar heading into 2021. Policy divergences may become more apparent as we transition from the global downturn to the global rebound phase — with economies exhibiting different recovery paths based on domestic factors (COVID-19 second wave, ability to successfully reopen economies, varying hysteresis effects). As short-dated global yields begin to recover, one way US rates could be anchored lower for longer is if the Fed adopts some form of Yield Curve Control (or flexible QE) — that sees the pace of asset-buying marginally increased to curb any pre-emptive shift higher in the US yield curve. Certainly, if any ‘Fed last to hike’ sentiment were reflected in market pricing — then short-term US rate differentials could move lower in a way that would see a weaker USD. But given where we are today — and still grappling with the fallout from the crisis — we may be a good 6–12 months away from even considering this scenario from being priced into markets.

On the growth side, the US economy is not currently expected to be hit worse than the RoW from the Corona Crisis — although it really is too early to call. Our Dollar Smile Theory work shows that global economic recessions yield a strong dollar environment — and this should be the baseline for how the dollar performs in 2020. Beyond this, the US economy would have to materially underperform the RoW for the dollar to weaken over the next few years — and it may require something like a US health policy mistake (opening up the economy too fast) for this divergence to occur. RoW-US growth differentials tend to widen by around 2ppts during USD bear cycles. Even if the US recovers slower than other major economies (not the consensus scenario), it is highly unlikely that we’ll any significant divergence in the recovery paths that would warrant a substantially weaker US dollar.

2. A wider US current account deficit and above-trend global trade growth are necessary for a dollar bear trend

Unlike in 2010, ongoing US-China trade uncertainty puts a dampener on the prospects of a big post-crisis global trade rebound

A bigger twin deficit in the US is almost certain for the next few years — not least given the large fiscal stimulus that has been deployed by Congress to fight the US economic lockdown. The US government primary deficit is expected to reach 13.5% of GDP in 2020 (versus 3.6% in 2019) — on par with what was seen during the Great Financial Crisis. However, there is a high degree of uncertainty over how the current account deficit evolves in the coming years given the current US administration’s protectionist policy stance.

Global trade growth has already been on a declining path since 2019 following the onset of US tariffs on Chinese imports. With US-China trade and geopolitical uncertainty set to continue in the run-up to the November 2020 US Presidential Elections — one has to question the ability and extent to which global trade can rebound in 2H20. Indeed, the minor USD bear trend that followed the GFC between March 2009 and July 2011 was underpinned by several years of above-trend global trade growth. Given the circumstances, it is highly likely that this time may be different.

3. Global investors need to put money to work in cheap RoW assets for the dollar to weaken

US equities continue to outperform in 2020 despite their relatively expensive valuations — suggesting that global investors still see US stocks and credit as the best of a bad bunch

The recent USD bear trends of 2002–2008 (-25%) and 2009–2011 (-17%) were both characterised by greater global portfolio shifts towards RoW assets — with US equities underperforming during these periods. Of late, however, there has been a clear preference by global investors for US equities — with the S&P 500 posting an average annual outperformance of 9.8% since August 2011 versus its global peers. This relative outperformance has only accelerated since the Corona Crisis hit global markets (albeit stock markets across the world have been very choppy). There’s little to suggest that this trend will turn on its head anytime soon — much like the US relative growth story, there would need to be an idiosyncratic US shock from the current crisis that clearly impedes the US recovery relative to the RoW. With the Fed also making sure this doesn’t happen by buying just about anything it can get its hands on — it is highly unlikely that US policy inertia will be such an idiosyncratic shock. Instead, one would have to look to arguments such as a greater risk of a second COVID-19 wave in the US or a bigger US corporate default cycle to justify US equities from materially underperforming the RoW from here. It’s too early for anyone to make this their central scenario right now.

And what about the possibility of official US Treasury FX intervention to weaken the dollar…?

The Broad Real Dollar Index has never embarked on a multi-year bull run when it has been more than 7% overvalued in the last 50 years. That’s because the 1980s and 1990s were defined by large-scale coordinated FX interventions across major economies — aimed at either weakening or strengthening the dollar whenever it reached extreme levels of misvaluation.

The idea of official US Treasury FX intervention to weaken the dollar has gained greater airtime in recent years — not least due to anti-strong dollar comments by President Trump. This debate certainly needs its own separate article (see here for a quick primer). But here’s the bottom line. Is it possible for the US to unilaterally intervene in FX markets to weaken the dollar? Yes. Will they? Highly doubt it. As the experience over the 1980s and 1990s shows, official FX interventions by authorities tend to do more harm than good. There are solid reasons why the dollar is strong right now — not least portfolio-related flows. Governments attempting to correct any arbitrary concept of misvaluation would only create more uncertainty in an already highly uncertain investment environment. But another 10% rally in the dollar — and, well, the idea of unilateral US FX intervention stands a greater chance of becoming a reality.

Since the coronavirus outbreak, the profile of the World Health Organization has skyrocketed, and so have suspicions about its motives and alliances. Which is why this year’s annual meeting of the organization’s members – which is slated to begin on Monday – should get interesting.

As the US, Australia and other skeptical western states are expected to confront China and about the possibility of an investigation into Beijing’s and the WHO’s handling of the outbreak during its earliest days.

The coronavirus will be the focus for the World Health Assembly meeting, to be attended by all 194 WHO member states plus observers, and where policies and budgets are reviewed and approved.

But all eyes will be on how countries – including the US, Australia, Canada, France and Germany – pursue an investigation into China’s handling of the pandemic within the framework of the global health body. That could include taking the Chinese government to the international court.

Leaders of these countries have already made clear that they want an inquiry, including investigating the origin of the virus, whether it was initially covered up by China, and if Beijing was slow to tell the world that the virus was being transmitted between humans.

The WHO has itself been under fire, attacked for praising China’s pandemic response as “transparent” despite Beijing’s suppression of whistle-blowers and information at the start of the outbreak.

Beijing has, of course, rejected accusations that it covered up the virus during the initial weeks after the outbreak, as well as claims the virus might have leaked or, worse, been purposefully released, by a biolab in Wuhan. And while the CCP has said it would support a WHO-led inquiry into the virus’s origins, it has simultaneously slammed Australia, the US and other countries that have insisted on an investigation in the face of Beijing’s reticence and obvious reluctance by accusing them of “politicizing” the outbreak (language that, like CCP criticism of phrases like “Chinese virus” and “Wuhan virus”, has found its way into the rhetoric of the American left).

However, hypothetically speaking, even if the WHO authorized an investigation, which stumbled upon some new evidence or a ‘smoking gun’ to suggest that China is much more culpable than initially believed, there’s little the WHO could do to hold China to account. Legally speaking, the WHO has the power to refer cases to the International Court of Justice in the Hague. However, China has already flouted the ICJ once, a gesture which underlined the fact that the ICJ has no power to enforce any of its decisions, as the SCMP reminds us.

The last time the Chinese government was sued in the international court was in 2016, when the Permanent Court of Arbitration ruled in favour of the Philippines over the South China Sea. It said Beijing’s territorial claims to the area lacked legal basis and were contrary to an international maritime convention. Beijing did not take part in the trial and has rejected the legitimacy of the ruling.

Thanks to its position as a permanent member of the UN Security Council, China is effectively immune to any kind of legal or police action from an international standpoint. A decision against China by the ICJ would require a vote by the Security Council to approve enforcement, a vote which China would obviously veto.

Another mechanism, though it has also never before been used (just like the WHO has never actually referred a case to the ICJ), is the International Health Regulations. Enacted and adopted by all WHO members in 2005, the IHR “suggests” – a key word – that all conflicts brought before the WHO should be resolved in a matter “related to its interpretation or application through negotiation, meditation and conciliation.”

But the IHR has already been repeatedly violated by almost every WHO member (travel restrictions are one example).

“The WHO has never taken another state to the ICJ, and I do not anticipate that,” said Steven Hoffman, professor of global health, law and political science at York University’s Global Strategy Lab in Toronto. “If it happens it will be unprecedented.”

[…]

“There are a lot of challenges as to how countries can successfully resolve disputes. Dozens of countries have violated regulations under the IHR in the Covid-19 pandemic and even back in the days during Ebola,” he said.

“When countries imposed targeted trade and travel restrictions on a particular country, it was already a clear violation of Article 43 of the IHR. There is no effective way to complain or seek recourse among countries. China has been subjected to such restrictions and in theory they can take those countries to the ICJ, but I also do not think they will,” he said.

With few obvious alternatives, politicians in the US have been pushing to pass a federal law that would allow plaintiffs to sue the Chinese state in US courts. Last month, Missouri became the first state to sue the Chinese government since the outbreak began. The lawsuit, filed in the US District Court for Eastern Missouri, alleges Beijing’s denials and cover-ups led to a pandemic that caused “enormous loss of life, human suffering and economic turmoil.” Republican Senators have introduced a bill that would allow US citizens to sue, potentially creating an avenue for those infected and the families of survivors to sue.

Gian Luca Burci, adjunct professor of international law at the Graduate Institute Geneva, said national lawsuits and unilateral actions by the US government would do more reputational than legal harm to China. “While there’s a low legal risk, there is a political and reputational risk here,” he said.

“Negative repercussions could be multifarious and damaging. China is concerned that there will be any kind of international investigation – China would have to consent to one, but it is not clear they would,” he said. “There is a need for a fact-finding mission to confirm what happened, and what went wrong, in China and around the world.”

Certainly, tomorrow’s meeting is bound to be unbelievably tense considering the continuing escalation between the US and China. The 73rd World Health Assembly begins Monday and will continue on Tuesday. We suspect it will draw far more interest from investors and the public than in years past.

Submitted by Nicholas Colas of DataTrek Research

How will the S&P 500 change as a result of the economic impacts of COVID-19? Scores of companies in the index now merit removal because of diminished market caps. But… S&P also requires a company to post a 4-quarter profit to be included. Consider Tesla, which has a market cap sufficient to make it the 500’s 64th largest stock but now won’t be profitable enough for several quarters. Disruption matters to S&P 500 returns: without AAPL, MSFT and GOOG returns over the last decade would have been 23% lower.

Even as Elon Musk’s market cap-based compensation plan stands to net him as much as $700 million this year, the most important number for capital markets is less than half that: $145 million. That’s how much Tesla would have had to earn in Q1 to post its first ever 4-quarter profit. Elon’s pay is partially set by TSLA’s market cap, which stands at $151 billion today, so it’s not like Q1’s $129 million shortfall matters much to him.

But showing black ink at the bottom of an annualized income statement still has one point of relevance: a company can’t get into the S&P 500 without it. Getting TSLA into the 500 would dramatically remake the automotive slice of the index from one that centers on the sale of pickup trucks (all of GM and Ford’s profits) to electric vehicles. Tesla’s weight in the index would be about 0.66%, versus 0.12% for GM and 0.08% for Ford. It would slot in between Salesforce.com ($141 billion market cap) and Comcast ($165 billion), and rank as the 64th largest stock in the 500.

But… Given presumed lower demand for luxury electric vehicles over the next year or two, Tesla isn’t likely to shoulder its way into the 500 for a while and this got us thinking about the nature of index investing in a post-COVID Crisis world.

Three thoughts on this:

#1: The S&P 500 needs large, scalable and disruptive businesses to both reflect American economic reality and provide reasonable returns to index investors. A few examples:

• Apple’s market cap has grown by $1 trillion from the end of 2010 to now. That is 7.5% of the entire gain in the S&P 500 over the last decade.
• Google’s market cap is up by $800 billion over the same timeframe, 6.0% of the S&P’s gain.
• Microsoft’s market cap has increased by $1.2 trillion since 2010, 9% of the S&P’s gain.

The upshot here: all these companies had similar/slightly larger market caps in 2010 as TSLA has just now, and collectively they make up 23% of all the gains in the S&P 500 over the last decade. Their performance is what made the S&P 500 compound over the last decade at 13.4% instead of 10.4%. We’re not saying Tesla is as good as any of these companies; it could be better, worse, or just different. But not including TSLA in the 500 means the index will be missing a company that could make an outsized difference to long run returns.

#2: The list of companies in the S&P 500 changes happen frequently, and given recent market volatility the index committee could have to replace +30 companies this year alone.

• Last year 20 companies were deleted from the S&P 500 due primarily to acquisitions or too-low market caps, replaced by 20 companies chosen by the index committee. In 2018 there were 22 changes, and in 2017 there were 24.
• There are now many companies that fall well below S&P’s current $8.2 billion market cap requirement for initial inclusion in the 500. Alaska Air, which was just added in 2016, is valued at $3.5 billion, for example. Apparel maker PVH has a market cap of $3.1 billion, as does iconic brand Harley-Davidson.

The bottom line on this point: the S&P committee is going to have to decide how long they want to wait before ditching COVID-damaged companies from the 500, and there are certainly enough to allow them to dramatically remake the index if they so choose.

#3: The sorts of companies that can post a 4-quarter profit in a post-COVID world are very different from those which might have had a chance before the outbreak. Since this is the cost of entry into the S&P 500, it will alter the profile of companies the S&P committee can consider for index inclusion this year:

• Those based on travel, leisure, or the sharing economy don’t have much of a chance. Uber, Lyft, and similar business models will remain unprofitable for years to come.
• Worth noting: S&P protocols require a company to be profitable in the quarter immediately prior to its inclusion in the index. With Q2 2020 expected to be even worse than Q1 in terms of corporate earnings, that’s an additional notable constraint to many companies’ potential inclusion.
• With technology already 26% of the S&P 500 and 36% once you include Amazon, Google and Facebook, the S&P committee may be reluctant to layer on even more disruptive tech into an already concentrated index.

The bottom line: as S&P considers what to add to the 500 this year, it may well use the opportunity to add non-Tech names and nibble away at that sector’s preeminence. Finding profitable firms, however, will be more challenging than any time since 2008/2009.

Pulling this all together: the S&P 500 may be the world’s most-followed passive index but COVID-19 and its aftermath is going to force its constructors into some very active choices. Based on existing financial requirements (profitability) and an already top-heavy (with Tech) portfolio, there is a good chance important disruptive companies will not make it in. How that changes the S&P’s long run return potential remains to be seen, but history is clear on the fact that returns come from disruptive companies first and everything else a very distant second.

With the popularity of the ESPN documentary on Michael Jordan, “The Last Dance”, soaring, it’s a great time to take your Michael Jordan memorabilia to the market if you are thinking of selling.

That’s what the owner of Michael’s custom made “Air Jordan 1s” found out when he sold them at auction for $560,000 – more than four times what the original asking price was, according to Bloomberg.

The sneakers were made for Jordan in both size 13 and size 13.5, and came in Chicago Bulls colors. They are autographed by Jordan and were featured in the the ESPN documentary. 

The auction took place at Sotheby’s, the same auction house that held the previous record for selling sneakers at auction with the $437,500 sale of Nike’s “Moon Shoe” last year. 

The seller of the “Air Jordan 1s” is Jordan Geller, a collector and founder of the Shoezeum, known to be the world’s first sneaker museum. 

The documentary on ESPN has benefited from the lack of live sports and nationwide lockdowns, and has been racking up record ratings. It has widely been considered to be a resounding success for ESPN: about 6 million people have tuned in every Sunday night to watch it. 

The final two episodes of the 10 part documentary air on Sunday, May 17.