Stock markets get a reality check but downside risks limited
After the strongest US stock market rally in April since 1987, trading in the first day of May brought with it a sharpest drop since the big sell-off abruptly ended on 23rd of March. Although earnings results within the tech space were generally decent, rising pandemic-related costs at Amazon and an absence of earnings guidance by Apple provided enough grounds for the market to sell off. Even the more promising results from clinical trials of Gilead’s drug for Covid-19 sufferers failed to hold sentiment in positive territory.
The global economic data continues to paint a grim picture of falling output, rising unemployment and surging government and corporate debt levels which are bound to worsen in the current quarter. Moreover, the fear of low growth potential in the post lock-down phase is perhaps even more discouraging as new guidelines for states that are looking to open up already suggest that most consumer-facing businesses need to operate at suboptimal capacities for the rest of the year to keep the contagion at bay. This leaves earnings recovery prospects for the second half of this year at low trajectories at best to expect the stock market rally to continue from these high levels.
Nevertheless, with global bond yields trading close to their all-time lows while debt issuance are likely to surge from here, and central banks pumping unprecedented levels of liquidity into financial systems, we think it is highly unlikely that stock markets will test their March lows. Indeed, we think many investors who missed the big rally in the past 6 weeks are likely to become more willing buyers on any notable correction in the coming few weeks. This is especially so if we get more positive results from mass clinical trials of other drugs and those testing combination of treatments to help lower fatality rates. Needless to add, any positive findings from the many human trials of 70 plus vaccines in process could also easily lead to another big surge in stocks prices. These upside risks will likely tame the level of negativity in the coming weeks.
China bashing a growing threat to global economic and security stability
As we mentioned last week, we have become increasingly uneasy about the strategy adopted by US and EU policy makers in shifting the blame of the pandemic on China, just at the time when the world needs to come together to tackle the spread of the pathogen. With Australia and India also joining the chorus of anti-China rhetoric, potential for rising trade sanctions and flaring up of tensions in shape of Western support for HK democracy movement, Taiwan’s independence, territorial disputes in South China Sea or even potentially sparking a future vaccine war in a more polarised world are all becoming worryingly possibilities that could unnerve investors and dampen hopes for global economic recovery.
The latest US intelligence report stating that they believe Covid-19 was not man-made or genetically modified but could possibly be a result of an accident at the Wuhan’s infectious disease lab leaves China firmly on the hook and gives enough reasons for Trump and other populist leaders to point the finger firmly at China. With over a third of the original 41 infected cases reportedly having had no direct exposure to Huanan Seafood Market, there is indeed some credible evidence that suggest a possible accident in releasing the pathogen and an ensuing cover-up that entailed silencing the doctors that initially raised the alarm.
This is especially so given that Wuhan Institute of Virology, houses the world’s largest collection of coronavirus, particularly its “gain of function” experiments that purposely try to jump the virus from bats to other animal species to study how these pathogens spread. The Chinese officialdom are not helping matters by stating that they have no concrete evidence that the virus even came from within China, an unbelievable narrative, perhaps more targeted at their own nation but one that raise more questions about their credibility and China’s account of how the virus initially spread and how much they knew about it in the latter months of last year. Needless to add, we are watching the related events very carefully as any possible sanctions on exports to China, leave Japan highly exposed.
Japan’s lockdown could prove far more prolonged
To go straight to the conclusion of this section, and to briefly focus on our own market, we think national emergency status in Japan will remain in place well into late summer and possibly even spill into autumn. What is now clearer than ever is that the virus has infected a much larger percentage of global population (majority of which are asymptomatic) than the official tallies suggest and easing of lock-down regimes highly depend on how carefully they are managed and available hospital capacities to be able to cope with caring for new waves of those who become sick.
We think in this criteria, Japan scores poorly among the G7 nations. This is partly due to notably delayed response time by its government in terms of implementing a more effective lock-down policies, the country’s slow ramp-up in testing and contact tracing, not to mention, securing adequate levels of personal protective gear for its medical staff which has led to already overstretched hospital capacities. Add the fact that Japan has one of the world’s fastest ageing demographics which leave over 30% of its population at high risk of infections and you have a recipe for an unfolding disaster.
Not unlike the recent findings in Europe, we suspect virus-related fatalities in Japan could be much higher than what has been reported as many may have passed away outside of hospitals to be counted in the tally. This is especially as testing capacities have remained woefully inadequate and are mainly confined for those admitted to hospitals, and only those showing typical symptoms. With recent studies suggesting that Covid-19 could also attack the immune system and other organs, not to mention, causing thickening of the blood that could lead to strokes among the elderly, one could easily see why higher levels of fatalities could have gone undetected, especially as Japan’s fast ageing population had already been pushing up death rates above 1.3mn last year, making it more difficult to detect any spikes in recent deaths.