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May 28, 2020
  • Gold remains the most convincing safe haven given the dual risks of inflation and deflation in different parts of the globe, though “safe” is a relative term given the unprecedented nature of the crisis.
  • Declining production and export numbers in India have investors concerned that the proposed agriculture reforms and incentives to move supply chains within the country’s borders do not go far enough.
  • The overall uncertainty about the recovery is mirrored in private equities, as the guessing game about which sectors will bounce back when (and where) continues. The wide range of company valuations seen in the first quarter of 2020 will likely show up when 2Q data is available after June 30.

In a world eager for any good news, the tentative but steady overall growth in the S&P 500 one month after reaching bottom could be cause for celebration. Instead, a more nuanced look is warranted.

Walmart’s strong stock performance, coming the same week that the company retained its mint position in the Fortune 500, tells us a number of things that we already know: consumers are doubling down on staples — such as the household goods sold at Walmart — and taking a highly cautious look ahead to a future where lockdowns are lifted. This is leading to some signs of life in the airline, restaurant, and hotel industries.

However, the defense industry is the main driver of the current rally, recouping 10% of the sector’s losses in the initial market shock and outpacing its role in the rally after the last financial crisis. The relative durability of health, tech, and consumer goods — all necessities in some capacity during a crisis of this design and magnitude — are also contributing to the current rally.

Any celebration can start when the rally is sustained and paid with a marked improvement in unemployment and hiring numbers, all of which remain troubling across the world.

For businesses in the midst of responding to the pandemic, the purchase of bonds in the form of debt can be the economic equivalent of treading water. Corporate bonds offer a potentially higher yield than government bonds because of their wider spread. Now that the U.S. Federal Reserve’s purchase of corporate debt has pushed the credit worthiness of those corporations back to nearly pre-crisis levels, some concerns about bankruptcies have been alleviated.

New Risks for Emerging Market Debt

Investors did not have to consider the debt levels in emerging markets during the last financial crisis because few had taken on a significant amount. Ten years later, the debt-fueled growth across the Global South is at a standstill as the world responds to the pandemic. Investors holding those bonds must decide whether to look for an exit or hang on through the lengthy resolution process. The debt currency adds another layer of complication; emerging markets are more likely to have instability in their currency exchanges given the limited ability of their respective governments to manage and mitigate alongside the U.S. dollar or the Euro.

The EU’s Unifying Proposal

The $545 billion COVID-19 relief fund proposed by French President Emmanuel Macron and German Chancellor Angela Merkel rallied markets across asset classes — and not just because of the dollar amount. The proposal includes shared debt across EU countries, long a sticking point in building solidarity across Europe, and signals that the pandemic may bring the continent together instead of splitting it apart. The proposal remains at the European Commission level and will require agreement from the 27 member states. It will also lighten the load of the European Central Bank, which to date has driven quantitative easing to keep the economy afloat.

  • What looks like an oil market rally is driven more by sentiment than a solution to the ongoing lack of storage. Oil futures into the summer and autumn months may experience a sharp decline as the reality of the mismatched production and product hits home for many investors.
  • Earnings data from 2Q will tell a more complete story than first-quarter data, which only captured the very beginning of the coronavirus pandemic. Data from April 1-June 30 falls fully within the ongoing crisis and can point to the pace and trajectory of recovery. In such a dynamic environment, any positive news about a vaccine over the next six weeks will also shape those numbers.

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