Most major share markets fell sharply over the last week on concerns about a second wave of coronavirus cases in several US states and the pace of economic recovery after cautious US Federal Reserve comments
For the week US shares fell 4.8%, Eurozone shares declined 6.4% and Japanese shares lost 2.4% but Chinese shares rose 0.1%. Reflecting the weak global lead Australian shares fell sharply on Thursday and Friday resulting in a loss of 2.5% for the week with falls in energy, property and financial shares leading the way down with defensives like utilities, consumer staples and health shares holding up better.
The return to “risk off” also saw bond yields fall back sharply. Commodity prices were mixed with oil down but metals and the iron ore price up. The Australian dollar fell consistent with the return of investor risk aversion.
A second wave risk of COVID-19
While worries about coronavirus perked up again over the last week, there has been little change to the broad trends in terms of coronavirus cases. New cases continue to trace out an uptrend.
New cases are trending down in developed countries, albeit more slowly over the last month, but the trend remains up in emerging countries, notably Brazil, India, Pakistan, Mexico, Saudi Arabia, Bangladesh and Indonesia.
Concern about coronavirus came back into focus over the last week with US infectious disease expert Anthony Fauci warning it’s not over and that we are going to need billions of vaccine doses globally, and talk of a “second wave” of cases in US states following reopening. Mass anti-racist protests have probably added to the renewed unease.
The US is at greater risk than most other developed countries of a second wave because reopening started before a sharp downtrend in new cases and many US states moved ahead of the US Government’s own medical guidelines to reopening egged on by President Trump.
Around 20 states are seeing an increase in new cases (with about half just seeing a continuation of the initial rising trend and the rest seeing “second waves”). The total number of new US cases on a daily basis has been fluctuating in a range around 20,000 to 25,000 for a month now with some states seeing falls and others rises – so there is nothing really new here.
The US may have learned to trace and quarantine better and to better isolate those most at risk of dying from a second wave while enabling the economy to remain open (although I am a bit sceptical of that). The bottom line is that it’s a risk we will have to keep an eye on.
Fortunately, other developed countries have proceeded more carefully in reopening than many US states, waiting until there was a bigger decline in new cases. This includes Europe, Japan and of course New Zealand (which now has no cases and has removed its lockdown, although international travel restrictions still apply) and Australia. Australia is continuing to see few new cases.
Economic hit continues
Headlines continue to focus on the huge hit to economic activity this year from the coronavirus shutdown, with both the World Bank and OECD following the IMF two months ago in forecasting the worst global recession since the 1930s and the US NBER (National Bureau of Economic Research) declaring that the US entered recession in February.
As with the revelation a week ago that Australia has probably entered recession, this is all old news and nothing really surprising given the hit to economic activity that follows from telling people to stay at home and the associated uncertainty. It was anticipated by investment markets back in February and March.
Historically, by the time the US NBER declares recessions they are often over. As we have been noting for several weeks now, more timely high frequency data continues to indicate that economic activity is picking up after the easing of shutdowns.
This is confirmed by our weekly economic activity trackers for the US and Australia based on high frequency data for things like restaurant bookings, confidence, retail foot traffic, box office takings, hotel bookings, credit card data, mobility indexes & jobs data which hit bottom in mid-April. The Australian Economic Activity Tracker has now risen for eight weeks in a row.
Australia relatively well placed
It seems the OECD agrees with our assessment the Australian economy will come through this period better than many countries. There are three reasons why Australia should perform better: it has seen better virus control; it has seen a stronger government support response; and our key trading partner is recovering ahead of the rest of the world benefitting key exports like iron ore.
On the fiscal stimulus front Australia’s stimulus at nearly 8% of GDP, while down from 11% prior to the realisation that JobKeeper will cost less because the economy is stronger, is stronger than most countries and better targeted as evidenced by a lower measured unemployment rate.
I also agree that now that the economy is reopening and recovering faster than envisaged back in March it makes sense to reduce support for those that no longer need it (and where it may be acting as a disincentive to return to work) and reallocate it to parts of the economy that will need it for longer (such as the extension to the instant asset write off, and assistance for industries like the arts, tourism, travel and higher education). The $60bn JobKeeper saving helps provide flexibility to do this.
While Australia’s trade tensions with China continued over the last week – with China cautioning tourists and students about coming to Australia posing a longer term risk to the relationship if the issue is not sorted – it’s academic in the short term given the travel ban (although that may change for students next month) and Australia is seeing the benefit of China’s recovery in strong export volumes of raw materials and the very high iron ore price. The latter helps drive stronger returns for shareholders in the big miners and helps tax revenue in Canberra.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital