Virus fears re-emerge while US presidential election run-up to dominate policies

US infection rates on the rise as White House ignores calls for caution 
Although Covid-19 infection rates have continued to surge across the world, particularly in Brazil and India, from the stock market perspective, the US is where it really matters and the news from there is hardly encouraging either. With infection rates surging in some US states that have been far less stringent with their lockdown regimes, any misplaced hopes for a v-shaped economic recovery seems to be fading fast. At least 19 states have seen new COVID-19 cases go up in the last two weeks with Florida, Texas, Arizona, Oklahoma, Oregon and Nevada posting particularly big spikes. 

News that Apple is once again shutting 11 of its stores in Florida, Arizona, North Carolina and South Carolina further underlined growing concerns about the resurgence in infection rates which some medical experts have labeled as ‘out of control’. Indeed, Dr. Fauci, the director of the US National Institute of Allergy and Infectious Diseases echoed some of our thoughts from last week’s weekly publication that what we are witnessing is the continuation of the first wave of the contagion and not the second wave as most commentators have labeled. Our fear is that the changing of the season in autumn could bring the real second wave which might prove far more deadly in case of a nasty mutation. 

Come what may, the possibility of going back into lockdowns is now increasingly remote as such measures have become economically and politically untenable. Indeed, the Trump administration look far too preoccupied with the coming presidential election to focus on the pandemic. Dr Fauci admits he hasn’t met with the US president for weeks, and medical experts’ warnings to the president not to hold his political rallies, especially in the infection hot-spots have fallen to deaf ears. Indeed, on Friday, the White House press secretary, confirmed that the virus task force will no longer brief the public, now that the U.S. is pressing ahead with reopening its economy. 

Investors await more fiscal stimulus after ending of lockdowns
All of the above factors have stopped in its tracks the brief sectoral shift we were witnessing only a few weeks back from best performing technology stocks to more bombed out industrial/cyclicals, not to mention, segments particularly impacted by the virus like travel-related names. Although we had removed most of the cyclical names from our short sell list in the past month concerned about the highly speculative market forces that briefly dominating big stock moves, we have retained our suggested heavy exposure to technology names where we see visibility to be only improving. 

We continue to believe that downside risks in share prices remain fairly limited in the near term as huge amount of funds remain on the sideline, parked in the money markets. However, further stock market upside in the coming quarter very much depends on introduction of more fiscal measures to continue to support the rising number of unemployed in the US and the state of the spread of the virus. As we noted in our June 6th publication, we suspect the month of July could prove challenging for stock markets which by then could be coming to grips with more cautious consumer spending patterns and a general reality check that global economic activity will remain at sub-optimal rates until an effective vaccine is discovered and administered globally, hopefully by H1 of next year. 

Should US policy makers prematurely remove the payment protection and unemployment support programs as Mr. Trump has hinted he might, then a more notable stock market correction could be on the offing. However, given that we are entering the vital last months in the run-up to the US presidential election, we think it is unlikely that the administration and GOP policy makers will risk such an outcome, especially as the Democratic candidate, Joe Biden has extended his lead in the most recent polls in key swing states. With China looking to have also pledged to accelerate its agricultural purchases from the US to meet its Phase 1 trade deal obligation and more importantly, to keep US farmers happy enough to support Mr. Trump in the presidential race, we also view talks of an imminent trade war as background political noise and an unlikely prospect.