‘Not A Great Place’

“I don’t think anybody should leave any bank earnings call this quarter simply feeling like the worst is absolutely behind us and it’s a rosy path ahead”, Michael Corbat told analysts Tuesday, underscoring the notion that whatever you want to say about the trajectory of the US economy, “V-shaped” probably isn’t the correct characterization.

Between them, the three big banks who reported earnings on Tuesday set aside nearly $30 billion for souring loans in Q2, more than expected and the most since the financial crisis.

Fixed income trading was a boon for JPMorgan and Citi (earnings recaps are here and here), but the underlying message from their results is clear. And Corbat didn’t mince words. “We don’t want people leaving the call simply thinking the world is a great place and it’s a V-shaped recovery”. (Nobody tell Larry Kudlow).

Signs of economic malaise weren’t hard to spot Tuesday. For example, Singapore logged a record 41.2% QoQ annualized contraction in Q2, worse than expected. YoY, the bellwether shrank 12.6%, also below already dour estimates. The figures came hot on the heels of local elections, and served as a poignant reminder of the extent to which small, open economies have been dealt a double-barreled blow by the pandemic’s effects on exports and domestic demand.

Meanwhile, the UK managed just a 1.8% rebound in May from April’s plunge, far short of the expected 5.5% bounce. A new projection from the Office for Budget Responsibility sees a contraction of at least 10% this year, which means that even under the most optimistic official projection, the country is still poised for its worst year since 1706.

Although all of the data is backward-looking, the problem is that the resurgence of the virus globally, its persistence in the US, and the devastating toll it’s taking in Brazil and India, all suggest the outlook is tenuous, at best.

Florida reported a record 132 COVID-19 deaths on Tuesday, for example, just two days after reporting a record 15,300 new cases. (Nobody tell Disney.)

Respondents to the latest edition of BofA’s Global Fund Manager survey now see a “U” or a “W”-shaped recovery as much more likely than any “V”, versus June’s poll. On the bright side, nearly three-quarters expect stronger global growth even as the bank notes “conviction in the strength and duration of the recovery is low”.

It’s difficult to get a sense of what equities are trading on in the US this week. Shares were buoyant for most of the session Tuesday, and unlike Monday, rallied into the close.

One step forward, one step back is the mantra for now.

And yet, it’s becoming increasingly clear that those who are just now starting to catch up to the optimistic narrative that prevailed in May (and into the first week of June), will need to pivot quickly to the new reality, wherein California is headed into a partial lockdown, and small business owners are throwing in the towel out of frustration in Texas.

Read more: End Of The Road: America’s Small Businesses Close For Good In New Lockdowns

There was some incrementally positive news in the vaccine race, as Moderna said a late-stage trial in 30,000 adults will go ahead this month. “The government is supporting Moderna’s project with nearly half a billion dollars and has chosen it as one of the first to enter large-scale human trials”, Reuters reminds you, adding that “tensions between the company and government scientists contributed to a delay of the trial launch”.

Later, ostensibly encouraging results showing the vaccine produced antibodies to the virus in all patients tested during a smaller trial sent the company’s shares up sharply in after hours trading.

On the geopolitical front, things seem to get more tedious by the hour. The UK jumped on board with the Trump administration’s efforts to blackball Huawei, as Boris Johnson said the country will purge the company’s technology from Britain’s 5G network within seven years. This is yet another flashpoint between London and Beijing, in addition to the Hong Kong security crackdown.

“This has not been an easy decision, but it is the right one for the UK telecoms networks, for our national security and our economy, both now in the long run”, Oliver Dowden, the minister who oversees telecommunications said. “By the time of the next election, we will have implemented in law, an irreversible path for the complete removal of Huawei equipment from our 5G networks”.

Mike Pompeo was pleased. China was not. The decision is “disappointing and wrong”, Liu Xiaoming, China’s envoy to the country lamented. “[It’s] questionable whether the UK can provide an open, fair and non-discriminatory business environment for companies from other countries”.

This came just hours after China sanctioned Lockheed Martin, and a day after Beijing said it would sanction Marco Rubio and Ted Cruz.

Somehow, “absurd” just feels like an inadequate adjective to describe this situation. The rapidity with which relations between China and the west are deteriorating is remarkable, indeed.

On Tuesday evening in the US, in what amounted to a formality, Trump signed the Hong Kong sanctions bill aimed at Chinese officials who undermine the city’s autonomy. He also ended US preferential treatment for the city.

Citi’s Corbat needn’t worry. It seems unlikely that anyone “thinks the world is a great place” right now — vaccine or no vaccine.


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6 thoughts on “‘Not A Great Place’

  1. “The rapidity with which relations between China and the west are deteriorating is remarkable, indeed.”

    I keep thinking back to, what was it, 2012? The dispute between China and Japan over the Senkaku/Daiyu islrts heated up. The reaction from the Chinese population was instructive. Japanese products were boycotted and Japanese car dealerships were attacked, as were drivers of Japanese cars. despite their reputation for better quality, Japanese products were boycotted. Some of this reaction was fanned up the Chinese state media and the resentments have deep roots.

    But what makes us think that US products will continue to be welcomed in China if relations get even worse. Sure, exports are not a big part of US GDP, but many US companies operate in China and, for some, it has been a good source of revenue and earnings.

    Wait until you see iPhones being clawed out of hipster hands in Beijing and thrown down the sewer by “patriotic” mobs. But maybe the government will seek to restrain things until the US election. That would be smart, but Trumps & Pomps just might make that impossible for Xi.

    1. The Pfizer phase 1 data for 2 of their mRNA vaccines was published a couple of weeks ago. The Moderna phase 1 data for one cohort with their mRNA vaccine was published today. There are of course many other vaccines in trials. Note that no mRNA vaccine has ever been approved–this is new technology. I believe all of the “Warp speed” funded vaccines are new technologies.

      With any vaccine development, there are often delays with data release, but there’s no way that the trials data for an approved vaccine wouldn’t become public at some point. However, this will play out in public in a very chaotic manner, probably. There will be a press release touting completion of phase 3 trials, “we have submitted the package to FDA for review”, etc. Possibly several companies will complete trials within weeks of each other. I imagine the data won’t immediately be available to the public at the time of submission. However, the FDA submission will only be the beginning. Even with rapid approval, the manufacturing and distribution will take time (even though manufacturing is beginning at-risk for the leading vaccines). Especially if there are multiple vaccines in review, there will be confusion in the public. There will be lots of anti-vax Facebook discussion. A proper effort would involve a carefully planned and executed public information campaign, which ideally would build on the strong, published data supporting the approval. But the FDA has already stated a pretty low bar for vaccine approval–so there will likely be room for criticism of the data, and possibly reluctance to get the vaccine even for non-anti-vaxxers if the roll-out isn’t done right–and I really hope a poor vaccine doesn’t get improperly approved due to political pressure. Unfortunately that’s possible in the current environment. Even in the best case, this will not be like flipping a switch.

      You see headlines like “The market rose on renewed hopes for a coronavirus vaccine.” It’s not that simple.

      1. The fact is no vaccine has ever been approved for any member of the coronavirus family. Ever. So hope floats. In lieu of a vaccine ever coming to market, there will be a well-orchestrated, timely release of “good vaccine news” during market downturns over the coming months. We’ll see if these headlines continue to keep stocks afloat…

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