‘I’m Struggling To Get Optimistic’

Global equities started the new week decisively on the back foot, as ongoing concerns about a second wave of the virus and another weekend of social unrest in the US rattled sentiment after the worst week for Wall Street since the height of the March panic.

Almost everything was lower headed into the US open Monday, from stocks to oil to copper to gold to Bitcoin, while 10-year yields stateside fell back to 0.68%.

At the overnight lows, S&P futures were off some ~9% since the knee-jerk highs touched after the FOMC statement last week. South Korean shares were bludgeoned to the tune of nearly 5% Monday, the worst loss since March 23. The tech-laden Kosdaq dropped more than 7%.

“At DB, we’ve had a lot of internal debate about whether the piecemeal, lack of centrally planned US approach to fighting this virus will eventually be worse for growth than the more synchronized and more thorough lockdown approach of Europe”, Deutsche Bank’s Jim Reid wrote Monday.

“My personal view is that whilst the latter looks very effective on paper, the fact that more of the US economy has remained open for longer means they’ll probably see a better short to medium term growth outlook [but] it’s hotly debated here”, Reid added, before noting that the death rate remains low, and “it’s possible that globally we are now shielding the vulnerable better and that even if we do see a second wave it might not be as deadly as the first”.

“In our base case, we assume that a second wave of infections will occur by autumn, but that it will be manageable and result in selective lockdowns”, Morgan Stanley said over the weekend.

Beijing’s coronavirus outbreak has reached almost 100 cases, and that’s got markets on edge.

Remember, China is adept at lockdowns and it would not be all that surprising to see the city put into quarantine mode if things get out of control. “Lockdowns in China can be very effective because of the infrastructure for restricting people from leaving their homes but at the same time ensuring that they have sufficient food and other essentials”, an epidemiology and biostatistics expert at the University of Hong Kong said Monday.

Apparently, genome sequencing indicates the virus tied to the new cases in Beijing (which have all been traced to the city’s biggest food and vegetable supply center) was imported from Europe, perhaps via contaminated seafood. Residents are advised not to eat salmon, which was removed from shelves. It has not been determined whether it’s possible for COVID to be transmitted from thawed food, but it apparently can live on frozen goods for as many as three months.

All of that brings uncomfortable questions about global trade and commerce back to the fore. After all, salmon is big business for some countries.

Meanwhile, activity data for May in China came in marginally below expectations, but it was bland on the whole. Industrial output rose for a second month, while retail sales dropped 2.8%, more than expected but indicative of a further rebound from the extremely depressed levels witnessed over the past several months. The dots show consensus estimates — these were not large misses.

Obviously, Chinese consumers could become wary if the virus makes a meaningful comeback in the country and it goes without saying that a large outbreak in Beijing is just about the last thing investors want to ponder. Still, relative to the size of the population, this “outbreak” is very small.

SocGen’s Kit Juckes is back in the office, and it doesn’t sound like he’s particularly enamored with it. “I’m back in a very quiet office, and everything’s happening slowly as a result”, he wrote in a Monday note. “The journey from bedroom to study via coffee is quicker than getting to Canary Wharf, for starters”.  Here’s a bit more from the affable Kit:

Risk aversion reigns in markets, despite Larry Kudlow’s attempt to boost US economic confidence, the prospect of a meeting between Mike Pompeo and Chinese officials in Hawaii this week, and a modest improvement in Chinese data. Concerns abut increased COVID-19 infections in the US, an outbreak in China and their spread in Latin America, all weigh. We have had plenty of bad Mondays followed by a bounce on Tuesday already this year but I’m struggling to get optimistic.

And that last line captures the suddenly sour zeitgeist. On Sunday evening, I wrote that “regardless of how risk assets start the new week, the mood is decidedly more somber than it was just seven days previous”.

Fast forward 12 hours, and risk assets were “feeling” just as somber as the people trading them.

Read more: Somber, Regardless.