Oprah Versus COVID.

It’s hard to say whether the mood on Monday was “sour” or just “subdued” given some locales were still offline for a holiday, but I suppose the distinction is largely meaningless.

Risk assets began a pivotal week on the back foot, as markets warily eye the onset of an earnings season that may be noticeably devoid of… well, of earnings.

Some have suggested we can simply forgive what are likely to be pervasive stumbles given the extraordinary circumstances, but if that’s supposed to entail buying stocks, it will mean ignoring the number you get when you slap a multiple on a much lower headline EPS figure for the S&P in 2020.

You’ll recall that we were already in an earnings recession headed into the “coronacrisis” (as it’s now known), with profit growth having flatlined despite 2019’s surge in equities.

Previously, consensus was looking for a “hockey stick” inflection in profit growth. That’s now totally out the question – or, if does materialize, it’s been pushed further into the future. it will come along around the same time the “V-shaped” recovery plays out, apparently. Note the yellow shaded area in the visual is the pre-COVID consensus.

As noted Sunday evening, it all hinges on the evolution of the pathogen. CDC Director Robert Redfield told NBC that the US is “nearing the peak right now”, which is good news, but there’s evidence out of Asia to suggest that relaxing containment protocol allows the virus to mount a comeback. That’s self-evident and it’s fast becoming the question of our time, so to speak.

“If the US is close to peaking, it could end up with a significantly lower fatality rate (per million of the population) than pretty much all of Europe bar Germany”, Deutsche Bank wrote late last week. “We have now seen in many regions that fatalities do lag improvements elsewhere as they can continue to rise when people who are hospitalized for long periods pass away even after case curves flatten”.

(Deutsche Bank)

In the meantime – i.e., as we wait to see whether the virus has, in fact, peaked, allowing for a tentative restart to economic activity – the Fed has engineered a classic imbalance designed to inflate asset prices.

“The Fed’s balance sheet has increased by almost $2 trillion over the past four weeks, which is one obvious reason why bond, credit and equity markets have performed almost in tandem recently”, Nordea’s Andreas Steno Larsen said Monday, noting that “the Fed is now both the lender and buyer of last resort”.

He uses the famous Oprah quote: “You get a car, you get a car, everybody gets a car”.

To get the full effect we may have to wait a while, though. “When a lot of money is printed versus the overall size of the equity and debt market, it is usually a bull signal, but it [often] comes with a time-lag”, Nordea notes, adding that we might well be about to experience a “crazy” surge into 2021, “but likely need to go lower first”.

(Nordea)

This speaks indirectly to the “risk” that policymakers may have “overstimulated”. If, by some miraculous turn, there is no serious “second wave” of the virus and a vaccine program is developed and implemented, we’re going to be left with one of the largest combined fiscal and monetary one-two punches in memory without an offsetting drag on demand.

That’s a recipe for fireworks. But, better safe than sorry, I suppose.

And yet, any calm will be of the “uneasy” variety, especially as traders’ tolerance for dour data is tested again and again over the next several weeks.

Given that, don’t be surprised if the dollar doesn’t periodically reassert itself to the chagrin of pretty much everything else, even as the Fed’s liquidity facilities work to unfreeze various short-term funding markets.

“As was the case during the global financial crisis investors have a tendency to view assets as either risky or safe during the height of an emergency”, Rabobank’s Jane Foley writes.

“We have only had a glimpse of the disastrous economic conditions which can be expected to present themselves in the weeks and months ahead and have had very little time to process the various tentacles of the crisis”, she goes on to warn. “As such, we expect to see further bouts of USD strength over the coming quarter”.