Markets ride the ‘second wave’

Share markets and COVID-19 infections continue to move upwards

4 July 2020 | Shane Oliver,  AMP Capital (Image: Dimon Blr)

Despite ongoing concerns about coronavirus most major share markets saw solid gains over the last week helped by good economic data, positive vaccine news and policy stimulus.

Japanese shares fell 0.9%, but US shares rose 4% in a holiday shortened week, Eurozone shares rose 2.8% and Chinese shares surged 6.8% taking them above their pre-coronavirus highs.

From their April lows many global and Australian economic data releases have seen a Deep V rebound and this has helped support share markets including Australian shares.

However, shares (except those in China) remain below their June highs and are still vulnerable to a further correction or consolidation, particularly if the renewed rise in coronavirus cases in the US and Australia leads to a renewed generalised lockdown.

Rise in second wave cases continues

The past week has seen the daily number of new coronavirus cases continuing to rise globally.

This is being driven by further surges in developing countries, combining with new cases in developed countries due to a surge in the US driven by non-northeastern states.

In Australia, Victoria is struggling to contain renewed outbreaks with new cases in Australia rising to levels last seen in April.

This in turn has seen several states in the US and Victoria in Australia pause or partially reverse the recent reopening

Economic indicators show vulnerability

Economic data releases for June continued to show the positive impact of economies reopening globally. Deep V rebounds were evident over the last week in global manufacturing PMIs, Chinese business conditions, the US ISM index, US car sales, US pending home sales, German retail sales and Australian retail sales.  

However, our more timely weekly economic activity trackers for the US and Australia faltered over the last week as re-openings stalled and consumers worried anew about the outlook.

Our Australian activity tracker fell over the last week in response to weaker readings for consumer confidence, hotel bookings and retail foot traffic and highlights the vulnerability of the economy to the latest rise in coronavirus cases.

Consequently, the recovery going forward will likely be slower than the “Deep V” rebound seen so far in some data.

Domestic economic signals mixed

Australian economic data was a mixed bag this week. Building approvals fell sharply in May, credit growth was weak and while ABS payroll jobs data shows almost a 30% recovery in jobs lost between early April and mid-May, the improvement has slowed in the last two weeks.

Yet, the 16.9% rebound in May retail sales – which was led by apparel, department stores and cafes/restaurants – was particularly impressive and leaves retail sales above their pre coronavirus shutdown levels.

It tells us that there was a lot of demand and people were keen to get out and spend again, and also suggests upside to our forecast for GDP to contract by 8% in the June quarter.

However, the going is likely to be a lot tougher in the months ahead as much pent up demand has likely been spent, apparel and café/restaurant sales are still way down from pre coronavirus levels and the renewed coronavirus threat will likely result in some renewal in consumer caution.

Meanwhile, home prices fell another 0.8% in June according to CoreLogic. We expect more falls ahead, particularly in Sydney and Melbourne given high unemployment, reduced demand from immigration and the depressed rental market.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital