Daily Markets: A V-Shaped Recovery? The Battle Between Coronavirus and the Economy

Today’s Big Picture

As we finish up the second quarter of 2020, the return to record-high new daily coronavirus cases in the U.S. is putting a serious damper on the V-shaped recovery narrative. The battle between the economy and the virus is taking center stage with growing numbers of daily new cases, rising hospitalizations, and increasing positive test rates leading some state governors to either slow or reverse their plans for reopening. 

The reversals, both in the direction of new daily cases and re-openings, are increasing uncertainty, which is a headwind to spending at the household and corporate level. Economic data for May indicated that the economy had bottomed out and was improving. This second round of restrictions could result in a double-dip that could reverse the improving sentiment from the re-openings. The reality is that as long as the virus remains a material threat, economic activity cannot fully recover, and the longer activity remains subdued, the more businesses will close permanently, and the longer it will take for the economy to return to pre-pandemic levels.

The major equity indices in Asia closed in the red today on renewed concerns over the pandemic and its impact on the global economy. Japan’s Nikkei fell 2.3%, South Korea’s Kospi lost 1.9%, China’s Shanghai Composite closed down 0.6%, and Hong Kong’s Hang Seng fell 1.2%, while Australia’s ASX 200 lost 1.5%.

Equity markets in Europe have been bouncing between red and green during their trading day, and U.S. equity futures point to positive moves at the open after having been earlier in negative territory.

Data Download

Coronavirus

There are now over 10.2 million confirmed cases of the coronavirus worldwide, and more than 500,000 lives lost in just seven months. The U.S., with less than 5% of the world’s population, has 25% of the world’s coronavirus cases, and with more than 125,000 lives lost, over 25% of the deaths caused by the virus. Brazil, the second most-affected nation, has over 1.3 million confirmed cases. 

The U.S. experienced a new record-high for daily cases on Friday, and while Saturday and Sunday were lower, all three days were over 40,000. The 7-day moving average for new daily cases is now more than 22% higher than it was at the prior peak 80 days ago on April 10; the U.S. has seen record-shattering job losses from lockdowns, and now daily new cases are higher than ever.

Last week 32 states saw a week-over-week increase in new cases, and eleven saw an increase of 50% or more. At least nine states have put their reopening plans on pause. According to CNN's Chief Medical Correspondent Dr. Sanjay Gupta, "This is a problem. We can spin it in all sorts of different ways. But the reality is that not only are things bad; they're as bad as they've ever been right now with regard to daily new infections.”

Dr. Anthony Fauci, the nation's top infectious disease expert, commented to CNBC’s Meg Tirrell, "For goodness sakes: avoid crowds, wear masks. Those are the fundamentals that -- when you look at the television clips, when you see pictures in the newspapers -- people are not doing that. That's a recipe for disaster.”

Only two states in the U.S., Connecticut and Rhode Island, have reported fewer cases week over week.

Miami’s Mayor began requiring masks in public at 5 pm on Thursday, noting that the state’s pandemic levels is 4 times more intense than it was in March. Texas and Florida both announced that all their state’s bars would be closed once again, and restaurant occupancy rates reduced. California’s hospitals have seen a 32% increase in coronavirus patients over the past two weeks.

Friday, the federal Health and Human Services Department announced that it will continue to support Covid-19 testing in Texas, by allowing federal testing sites to operate for an additional 14 days.

Brazil is potentially experiencing an absolute worst-case scenario with hospitals overflowing and its leader convinced that the malaria treatment chloroquine is the answer, despite the lack of data supporting that belief. The potential devastation that we may witness in a nation in which some neighborhoods have no access to clean water is mind-numbing. 

In Japan, Tokyo has experienced its highest infection rate since it ended the state of emergency and the largest case count since May 4.

Australia is seeing a spike in new cases with 75 new cases in Victoria.

In the U.K., the city of Leicester may face a localized lockdown after a recent surge has seen 25% of the city’s 2,494 cases appear in the past two weeks alone.

International Economy

Japan’s retail sales fell 12.3% YoY in May after a revised 13.9% decline in April, declining more than the expected 11.6% fall. This marks the third consecutive decline in retails sales for the country.

Economic sentiment in the Eurozone rose to 75.5 in June from the prior 67.5, falling short of expectations for an increase to 80. Consumer confidence improved to -14.7, as expected, from -18.8, its second consecutive monthly gain. Services sentiment rose less than expected to -35.6 from -43.6, falling short of the -25.4 forecast. Industrial Sentiment was equally weaker than expected, rising to -21.7 from -27.5, missing the -20 forecast. 

Domestic Economy

It is a light day today on the domestic data front. We will get data on Pending Home Sales, the Dallas Fed Manufacturing report, and will hear from Federal Reserve officials Daly and Williams. 

Markets

The rapid spread of Covid-19 in recent weeks is making an impression on investors, many of whom were looking for a V-shaped recovery that is becoming increasingly improbable. Equity markets in the U.S. were hit hard last Friday with the S&P 500 falling 2.4%, and every one of its 11 sectors lost ground on the day. The worst-hit were banks, big tech, and energy. The Dow lost 2.8%, with 29 of its 30 component stocks down for the day. Gold reached its highest level since October 8, 2012, to sit just 6% below its all-time high while interest rates on TIPS (Treasury Inflation-Protected Securities) reached new record lows Friday in light of weaker growth prospects.

The lopsided ratio of Nasdaq 100 (NDX) performance versus the S&P 500 (SPX) continued to expand last week, reaching the highest level for Nasdaq out-performance since the Dotcom Bubble in early 2000. The only other day in history in which the ratio was higher was March 10, 2000. The S&P 500 itself is becoming more and more concentrated with the five largest companies in the index, by market cap, accounting for more than 20% of the index’s total market cap. Through Friday, the Nasdaq 100 is up 31.6% for the quarter, while the S&P 500 is up 21.8%, the Dow 19.4%, the Russell 2000 28.6% and the S&P 600 up 39.2% - astounding gains during a global health crisis which has led to economies around the world contracting at a record pace.

Stocks to Watch

UK supermajor oil producer BP (BP) is selling its petrochemical business to INEOS for $5 billion as it looks to strengthen its balance sheet. Under the terms of the agreement, INEOS will pay BP a deposit of $400 million and will pay a further $3.6 billion on completion. Subject to regulatory and other approvals, the transaction is expected to complete by the end of 2020.

Wirecard (WRCDF) is the new Hertz (HTZ) as its shares have rallied over 125% in early trade today after the company vowed to continue business activities, despite filing for insolvency following the revelation that $2.1 billion is missing from its balance sheet, and its former CEO has been arrested.

After Thursday’s announcement by Verizon (VZ) that they would be suspending advertising on Facebook (FB) and Twitter (TWTR), Honda Motor Corp (HMC), Unilever (UN), Starbucks (SBUX), Coca Cola (KO) and PepsiCo (PEP) along with a number of closely held companies, also announced they would suspend advertising on the social media platforms in response to what they deemed lackluster efforts to control racism and hate speech. 

Microsoft (MSFT) announced it will be permanently closing all brick and mortar stores in response to the current Covid-19 pandemic. Since the stores closed initially back in March, employees have been re-tasked with helping small business and education clients re-tool to the new virtual paradigm.

After stating in its May earnings call that it would be evaluating all options to remaining an ongoing concern, Chesapeake Energy (CHK) announced it will commence voluntary Chapter 11 bankruptcy proceedings process. The action is expected to eliminate approximately $7B of debt, and the company has secured $2.5B of financing in the form of a $1.75B revolving debt facility and a $750M loan. Lenders have also agreed to backstop a $600m rights offering upon exiting bankruptcy.

Centogene (CNTG) announced it has launched the first walk-in COVID-19 testing facility in Germany at the Frankfurt Airport. Passengers flying to or from Frankfurt Airport with Lufthansa will be able to perform the test at a sampling center located near the main terminal. Testing can be completed the day before traveling or the same day before departure. All results are delivered to the passenger via a secure digital platform and connected to their ticket -- providing secured clearance for passengers flying to countries with entrance restrictions. Additionally, passengers can opt into an ID confirmation service, assuring authorities that the passengers' identities correspond with the test results.

As AMC Theatres (AMC) establishes its Covid-19 protocols for returning moviegoers, Walt Disney Company (DIS) announces that the release of its live-action remake of the popular animated film Mulan has been further delayed and is now slated to debut in theaters August 21.

Churchill Downs (CHDN) announced the reopening of the Presque Isle Down & Casino in Erie, PA, and that live, spectatorless racing will return July 27 through October 22. 

Graf Industrial (GRAF) is reported to be in talks to merge with autonomous vehicle sensor manufacturer Velodyne Lidar. Velodyne is backed by Ford (F) and Baidu (BIDU), according to Detroit News. 

The data analytics company most known for developing consumer credit quality metrics, FICO (FICO), has been awarded 13 new patents related to fraud, artificial intelligence, and decision management.  

Nokia (NOK) announced that it has been selected by Taiwan Mobile as the sole supplier of its 5G network in a three-year framework deal worth approximately €400 million.

Amazon (AMZN) announced that IHS Markit (INFO) has selected Amazon Web Services as its preferred cloud infrastructure provider and will be outsourcing the majority of its data processing infrastructure, corporate platforms, and end-user applications and services out of its own data centers to AWS. 

The Luckin Coffee (LK) saga continues as the company announced its board of directors had proposed a resolution to remove the current Chairman in association with the recent revelation of fraud at the company. The vote is set for July 2. 

Micron Technology (MU) reports Q3 2020 earnings after today’s market close. Investors that wish to get a jump on the corporate earnings reports to be had this week should visit Nasdaq’s earnings calendar page. 

On the Horizon

• Dates to mark:
  • June 30: Case-Shiller Home Prices, MNI Chicago PMI, Consumer Confidence
  • July 1: ADP Employment Report, Markit Manufacturing PMI, Construction Spending, ISM Manufacturing, Wards Vehicle Sales
  • July 2: Nonfarm Payrolls, Unemployment Rate, Durable Goods, Capital Goods, Factory Orders 

Thought for the Day

As the pandemic becomes more worrisome in the US and other parts of the Americas, we thought a little humor might be in order. Thanks to @BrigidWD for this one: “In an unsettling reversal of my teenage years, I am now yelling at my parents for going out.”

Disclosures

• Microsoft Corp (MSFT), Coca Cola Co. (KO), Pepsico (PEP), and Verizon Communications (VZ) are constituents in the Tematica Research's Thematic Dividend All-Stars Index.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Stocks Economy Coronavirus