JP Morgan: COVID-19 Impacts Across Markets
Highlights from the Global Research team on the implications of COVID-19 for the global economic and markets outlook. Each week, we will feature the key reports published.
Global Asset Allocation: Staying the Course, Awaiting a Recovery
J.P. Morgan Global Asset Allocation
The pace of equity gains has moderated over the past couple of weeks, but we remain positive on equities and see a return to previous highs by the first half of 2021, as virus dynamics continue to improve. While equities have retraced close to half their plunge, commodities continue to lag and investment grade credit has healed furthest. We retain a commodity overweight, focused on energy to position for a rebound from the historic rout, as economic activity restarts and the crude market rebalances.
Geopolitical Flashpoints: Are Oil Prices Potentially at an Inflection Point?
Joyce Chang and Global Research
While there is still a massive glut of oil that will need to be cleared before there can be any meaningful recovery in prices, we believe the global oil market is tentatively entering an inflection phase, where rebalancing has started, and we see WTI and Brent trading at parity at $34 per barrel towards year-end 2020. Natural gas is the obvious winner as widespread oil curtailments lead to a tight natural gas.
Which Countries Are Easing the COVID-19 Pandemic Containment Restrictions?
Since Denmark reopened some schools over 20 days ago, there has not been an appreciable rise in the daily new case count, providing evidence that it is possible to loosen restrictions without new infections increasing significantly. In the U.K., data suggesting a peak in overall deaths was reached in the week ending April 17, with deaths starting to fall the next week. On the data for the EU5, the most significant data point was an 8,000 catch up reporting of recovered patients, which accelerated the recovery in Italy. In the other countries, Germany’s and Spain’s active case count continued to fall strongly and France’s continues to plateau.
Emerging Markets: Where Are We on Infections and Containment?
Nora Szentivanyi & Anthony Wong
The majority of emerging markets (EM) are still in the midst of battling COVID-19 and containment measures have yet to be eased in a meaningful way. At the aggregate, the daily infection rate in developed markets is slowly declining whereas the daily case count is still rising in most EM regions, albeit very modestly in some. It is clear that a few countries in EM Asia—namely China and Korea—have moved past their respective peaks in new cases. Interestingly, Sub-Saharan Africa, EM excluding Asia and to a lesser extent Middle East and North Africa regions showed signs of moderation in new cases before a “second wave” took daily cases above the initial peak.
COVID-19 Latin America
Latin America COVID-19 curves are not showing meaningful signs of flattening yet and our Latin America local market strategists warrant keeping a neutral stance on the currency bloc, while underweight Brazil rates. Their analysis indicates uneven COVID-19 expansion amongst countries, with more challenging prospects for Brazil, and Mexico (where they are neutral the currency and rates), which executed relatively looser policies at first, while relatively better for countries such as Uruguay.
Global Economics and Macro Implications of COVID-19
U.S.: This Will Only Get Worse Before It Gets Better
The April jobs report gave us the fullest picture yet of the epic destruction of economic activity due to efforts to contain the pandemic. Nonfarm employment last month decreased by 20.5 million with leisure and hospitality accounting for over a third of the job losses. The April unemployment rate soared to 14.7% —a post-Great Depression high. However, this understates the magnitude of joblessness for two reasons. First, the labor force participation rate plunged from 62.7% to 60.2% and as a result the employment-to-population ratio nosedived from 60% to an all-time low of 51.3%. Second, the number of people classified as “employed but not at work due to other reasons” soared by almost 6 million, and the Bureau of Labor Statistics (BLS) conjectured that these people should have been classified as unemployed. Were it not for these two factors the unemployment rate would have been closer to 23%.
Europe: German Court Slams the ECJ and ECB
The German Federal Constitutional Court (GFCC) found that both the European Court of Justice (ECJ) and European Central Bank (ECB) acted ultra vires with regard to the ECB’s Asset Purchase Program (APP), but we suspect the ECB still has “broad discretion” to do what is needed, but it must be more careful in how it motivates its actions and how it talks about preventing larger bond spreads. This finding is mainly due to inadequate legal and economic justifications for the APP. Implications for the Pandemic Emergency Purchase Program (PEPP) are harder to gauge as the GFCC assesses all purchase programs in their entirety, rather than simply saying that issue limit must be at 33% in all circumstances.
Market Implications of COVID-19
U.S. Equity Strategy
Our expectation for S&P 500 of recovering its losses and reaching 3,400 (new highs) in the first half of 2021 remains intact. Our valuation models imply that the equity risk premia remains attractive, but does vary according to the equity universe—it is most attractive for Nasdaq, secular growth and sustainable income stocks over the medium-to-long term.
Crisis Watch VIII: What We’re Following and Thinking About
Spreads continue to chart a flat-to-grind-tighter course, which is consistent with our neutral to small overweight view for the corporate credit asset class overall. Aggregate spreads remain in recessionary territory, demand-side technicals still feel strong by primary market volumes and fundamental uncertainties thus far remain offset by the scale of the policy response. High yield default activity surged in April, with a record 19 companies filing for bankruptcy or missing an interest payment. U.S. high yield defaults are running at a 10-year high of 4.92%. We reiterate our full-year 8% forecast, but if the virus continues to keep parts of the U.S. economy closed longer than currently expected, then we could see the U.S. high yield default rate surpass 10% by year-end and possibly approach 15% in 12 months.
U.S. High Grade Corporate Bond Issuance: April 2020
Eric Beinstein & Sheila Xie
Primary issuance activity hit a new record of $285 billion in April, surpassing the prior record of $262 billion in March by 9% and bringing year-to-date high grade bond supply to $765 billion, up 85% year-over-year (yoy). New issuance in April was up 208% yoy and was 3.2 times the prior 4-year average of $88 billion. Companies are taking advantage of low U.S. Treasury yields and strong demand out the curve. In April, BBB issuance increased meaningfully to a record $152 billion.
Assessing Relative QE Vulnerabilities in G10 FX
Concurrent Quantitative Easing (QE) has more nuanced implications for foreign exchange (FX) than the rolling, sequential QE of the past decade. Global growth will likely remain more important for the U.S. dollar than Federal Reserve (Fed) QE. For FX, the enormous global scale of current central bank actions is likely to matter rather less than the relative scale of QE as well as the sequencing between countries.
Sector Level Views
Matthew R. Boss, CPA
Based on incoming call volume centered on Economic Impact Payments (EIP) under the U.S. CARES Act ($290 billion plus total with around $200 billion, or 70% paid out-to-date), there were four key survey takeaways from our proprietary U.S. consumer survey. They include: 1) $127 billion total retail sales impact; 2) online/“open” destination for discretionary dollars; 3) regional spend tied to COVID-19 case counts; and 4) relative category opportunity: footwear (including athletic), athletic apparel and denim were the top anticipated dollar spend versus jewelry/handbags ranking the lowest.
European Employment Services
Sylvia P Barker, CFA
It is clear that the U.S. digital staffing player, Wonolo, has an ambition to be a mainstream light industrial staffing company, competing with incumbents. Wonolo’s quick fill rates and hands-off matching process seem to be playing well into the COVID-19 environment of extremes with near-zero demand at business on lockdown and very high demand from essential businesses. Regulation is a powerful driver for the industry and Wonolo sits in the camp in favor of a “middle category” of workers usually known as a dependent contractors which exists in several countries but not the U.S. What does this all mean for companies Adecco and Randstad? Firstly, indications are that the recovery will be “normal” i.e. temp-led. Secondly, the U.S. market is big enough and while smaller traditional businesses might lose share, we see the large incumbents as well positioned. Pushing a negative view on Adecco and Randstad on the back of digital challengers is not credible, in our view. However, thirdly, we believe Adecco and Randstad will have to continue to spend on capital expenditures, operating expense and mergers and acquisitions in order to continuously evolve their offering.