Where Are We Headed?
This weekly is on the early side and I am wary of what Friday brings, especially as the debt ceiling saga gives rise to further bond market volatility.
Yet things were looking much more dire just three weeks ago. On 23rd March the US market had fallen by some 35% from the peak and short sellers were out in force. This was the day short interest in the main ETF, which tracks the US market, had reached a high for the year.
Then two things happened: first, it looked like the infection rates in both Italy and NYC had peaked. Second, massive Fed intervention, which has been covered extensively in these updates. These measures put the patient – in this case the economy – on life support but she was still in hospital. Nevertheless, markets got the message that the likelihood of a worst-case scenario had gone down and from this point equities rallied some 25%.
So how does the economy get out of hospital and back to normal?
Well, it looks like investors are seeing some light at the end of the tunnel on various fronts.
On Thursday evening, Trump gave his usual press conference and announced new guidelines to reopen the US economy in three phases. Furthermore, various European countries, including Germany have announced measures to ease restrictions gradually, starting next week.
On the drug discovery front, investors had news to cheer (hence the rally as of time of writing on Friday). Gilead shares surged in after-hours trading on Thursday after Stat News reported that the company’s Remdesivir trial for coronavirus patients is seeing rapid recoveries according to early data. More definitive news on this drug is expected to be announced at the end of April and in late May. Staying with pharmaceuticals, on Thursday Roche – the Swiss pharma major – said that it will aim to start selling coronavirus antibody tests next month. Finally, researchers at Oxford University yesterday announced that a vaccine might be ready for mass production by autumn, earlier than expected. Of course, one should accept all the usual caveats that go with any announcements from the pharmaceutical industry.
Chinese GDP data released
On economic data, there was a lot of negative news this week but there also is a glimmer of hope. Friday morning saw Chinese GDP first quarter data released. A backward-looking indicator, GDP was down some 7% year-on-year. However, very importantly, Chinese industrial production, which is a forward-looking indicator, surprised to the upside. So much so that the Goldman Sachs Current Activity Indicator for March now stands at +7.6% month-on-month on an annualised basis, up from -14.5% in February.
One other thing to watch closely is the push by French President Emmanuel Macron to get the European Union to provide more help to Italy to rebuild post-coronavirus, possibly in the form of common debt with a common guarantee. Should he succeed on his diplomatic mission against the initial wishes of Germany this would be very positive for the concept of Eurozone cohesion.