Weekly Update - Covid 19 - The next phase

At the global level, the pandemic now registers over 34 million confirmed cases and over 1 million deaths. The first wave of infections took hold in March, followed by a plateau at around 80,000 new cases per day before the second wave unfurled across many large emerging countries, taking us to the current level of around 285,000 per day. In a number of countries in Europe, notably Spain and France, the number of daily cases is now well above the levels reached in the spring.

This has led to worries that economies might be placed back in lockdown to stem the spread of the virus. Indeed, in recent days Spain has placed tight restrictions on the Madrid region while France has instructed some large cities such as Marseilles to close many establishments which are open to the public. However, we do not believe that sweeping nationwide lockdowns will follow. There is little political appetite to provoke another deep recession, especially with large amounts of fiscal stimulus (such as France’s €100bn plan) in the pipeline – the more the economy slows, the more difficult it will be to finance the recovery plans.

Moreover, the number of hospitalisations and deaths has not followed the same pattern as last spring. At 3 and 6 per 100,000 inhabitants respectively, the number of COVID-19 patients in hospitals across Spain and France remains well below the spring peaks of 49 and 33. And at the global level, the number of deaths reached a high of around 7,000 per day in mid-April before easing lower to today’s 5,300.

There are several possible explanations for the discrepancy between infections and fatalities. Most obviously, the number of tests being performed per week has sky-rocketed since April – from 193,000 to 694,000 in Spain and from 137,000 to 1,052,000 in France – which of course has an impact on the number of positive results. Second, treatment protocols in hospitals have been improved continuously as doctors learn more about the virus. Third, the summer and early autumn in the Northern hemisphere typically see fewer respiratory illnesses like influenza and pneumonia, which can aggravate COVID-19 symptoms – it will be important to follow hospitalisation trends once the winter flu season gets underway. As infection rates and hospitalisations have ebbed and flowed and restrictions have tightened, economic activity has begun to suffer. In the US, corporate and household confidence measures remain pretty robust, but the rapid fall in weekly jobless claims over Q2 has slowed to a trickle in September. In the euro zone, there is a stark contrast between confidence in manufacturing and services. September’s Purchasing Manager Index shows manufacturing confidence at 53.7 –well above the 50-point dividing line between expansion and contraction – while the services survey has slumped to 47.6. The mixed data suggest recovery will be more sluggish from now on.

Bottom line. Given the above factors – rising infections, tighter restrictions, mixed economic data – we expect the mix of fiscal and monetary policy to remain very accommodative. Although the US Congress may not manage to agree on a new coronavirus relief bill before next month’s election, we remain convinced that the stimulus will be forthcoming by early next year. Similarly, we expect the EU’s 27 governments to ratify the €750bn recovery fund in due course. And the Federal Reserve and the European Central Bank stand ready to ease further if necessary, most probably via asset purchases. All in all, the backdrop should remain supportive for risk assets.

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