Risky assets are under fresh pressure as investors worry about the prospect of waves of new coronavirus infections, with stocks and oil prices on the back foot as traders digest some worrying headlines.
Beijing has recorded a fresh cluster of the virus originating in the city’s largest wholesale food market. The Chinese capital has recorded 79 new cases since a locally transmitted infection was reported last Friday for the first time in nearly two months.
Plus, several US states that reopened weeks ago — including Arizona and Texas — have reported a rising number of infections and hospitalizations.
The prospect that China or parts of the United States could be forced to reinstate strict quarantine measures if infections get out of control has investors on edge after weeks of euphoric buying. The S&P 500’s 5.9% plunge last Thursday was a bracing reminder that markets remain vulnerable.
Stocks finished lower in Asia on Monday and dropped in early trading in Europe. Brent crude futures, the global benchmark for oil prices, remain below $39 per barrel, failing to regain ground after diving more than 7.5% last Thursday.
“The rally was partly based on expectations of the reopening of the economy,” Ed Yardeni, president of Yardeni Research, told clients Monday. “Now that reopening is happening, there’s fear of suboptimal results: less social distancing triggering a second wave of the virus, followed by another round of lockdowns.”
But Yardeni — and many of his Wall Street peers — are sticking to calls that markets can hold on to much of their recent gains, even if the path ahead is rocky. The VIX, a measure of S&P 500 volatility, shot up more than 15% on Monday.
“While more second waves of infection are possible, we don’t expect another wave of lockdowns,” Yardeni said. “The economy should continue to recover, in our opinion.”
In its mid-year outlook released Sunday, Morgan Stanley also maintained that the economy can make a strong rebound.
“We have greater confidence in our call for a V-shaped recovery, given recent upside surprises in growth data and policy action,” chief economist Chetan Ahya told clients. “The global economy bottomed in April and the recovery will gather further momentum, making this a short recession.”
The investment bank’s strategists added that despite the risks, they expect the market comeback to follow a more “traditional playbook” than some might expect.
“While the last four months have been exceptional, we think that this cycle has been, and will be, more ‘normal’ than appreciated,” they said. “A new cycle has started, and we think that investors should position as such.”
Companies use the pandemic to make big changes
The coronavirus pandemic is changing the way people work, shop and travel — causing companies to move faster to implement changes to their businesses that will allow them to stay competitive.
See here: BP is writing down the value of its assets by as much as $17.5 billion as a shift away from fossil fuels is accelerated by the pandemic, my CNN Business colleague Hanna Ziady reports.
The oil giant said Monday that the health crisis could have an “enduring impact on the global economy,” resulting in less demand for energy over a “sustained period.” It cut its assumed average price for Brent crude from 2021 to 2050 by 27% to $55 per barrel.
As a result of the changes, BP said it would take a writedown of up to 6% of its total assets in the second quarter. It may also stop developing some oil and gas fields as it invests in cleaner energy.
And while it’s no secret that the energy sector has been rocked by coronavirus, sending prices plunging as demand for crude dried up, it’s not the only industry rethinking its plans for the future.
Consumer goods behemoth Unilever said Monday that it is putting €1 billion ($1.1 billion) in a climate change fund over the next 10 years. The company now aims to hit a net zero emissions target for all its products by 2039.
“While the world is dealing with the devastating effects of the Covid-19 pandemic, and grappling with serious issues of inequality, we can’t let ourselves forget that the climate crisis is still a threat to all of us,” Unilever CEO Alan Jope said in a statement.
As the economy picks up, the US dollar is weakening
After surging higher earlier this year, the US dollar has given up most of its gains since mid-March — and analysts now think the currency could stay weak for some time.
Driving the fall: Aggressive easing by the Federal Reserve, optimism that global coronavirus infections can be contained and political instability. The run-up to the US presidential election in November is also poised to weigh on the dollar in the months ahead.
In recent years, the dollar has benefited from the relative outperformance of US assets, encouraging investors to pump money into the country’s markets, Goldman Sachs’ Zach Pandl explained in a note to clients last week. The dollar is also considered a safe-haven currency, which means coronavirus fears caused dollar hoarding to spike.
But with the Fed dropping interest rates to rock bottom, eating into yields on some US assets, and economic activity picking up again, Pandl thinks pressure on the dollar is likely to persist.
“A further recovery in the global economy should reinforce a depreciation trend in the US dollar,” he said.
Watch this space: The dollar has gained some ground since late last week when markets sold off, but remains depressed. Should the dollar start to strengthen dramatically again, it could be a sign that investors are seriously worried about the virus outlook.