“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.
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”.
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.