Good Morning,

Markets seem to be taking a slightly more relaxed approach to lockdowns than we’d have thought. Schools have been closed In Beijing and there are travel bans within the city and also from it, with 70% of today’s flights due to leave the airport today now cancelled. Though it’s only a very short timescale, the number of identified cases has dropped in the last couple of days and investors look like they may be waiting to see how quick and effective authoritarian rule is before running for the safe havens of cash, gold and government bonds. The number of active cases rose in a number of countries yesterday, including Germany which saw a 6.6% increase in active cases. There number is much lower than just about anybody else’s in Europe, but such a pickup will be cause for concern as it can’t be put down to an increase in testing.

Buoying hopes that round two might not be as dramatic as round one is a drug called dexamethasone, which has shown to reduce mortality rates for those on ventilators by a third. The drug is being touted as a building block for a wider ranging treatment, in combination with other drugs, and is readily available as it’s been used for years to treat asthma.

If Covid wasn’t enough of a risk issue, there are a couple of border conflicts to keep an eye on: North Korea blew up the joint liaison office in Kaesong yesterday – the diplomatic building shared with the South – in another escalation of recent tensions. Pyongyang are saying they’re angry with the South for allowing propaganda material to be flown from the border into North Korea and have been escalating the conflict rhetoric over the last few weeks.
Yesterday also saw violence between India and China, with 20 Indian troops dying as a result of conflict with Chinese military in the Kashmir region. We won’t pretend to have even a cursory understanding of the politics within the region, but when china’s foreign ministry tweets “China does not want to have a clash with India, but we do not fear it”, things are probably past the point of being resolved quietly with a diplomatic back channel.

Still the markets keep moving higher.

In the US: The Fed have said they’re ready to do more if necessary and they’ve got “plenty of dry powder” should economic conditions take a turn for the worse. Fed member Robert Kaplan was speaking to Bloomberg radio where he said that he expects the economy to shrink by about 4.5% this year and for unemployment to be at about 8% – both numbers seem incredibly optimistic given what we’ve seen so far.
The Fed’s switch to buying corporate bonds directly has raised some eyebrows, but chairman Powell has downplayed the switch, saying they’re not increasing the volume of what they’re buying, they’re just moving out of ETFs.  Speaking to the Senate banking committee Mr Powell said that the Fed doesn’t want to “run through the market like an elephant”, but has taken an excess of caution in order to support markets and wanted to follow through on their promises in March that they would participate in the corporate market. The market reversed its stock market falls after the Fed announced that they’d be doing this and therefore he believes that in order to support the risks that investors are taking, they need to back up their pledges and start buying.

It’s probably not the market that needs the help at the moment, but the consumer. Housing data shows that 30% of Americans missed their housing payments this month and though that’s a tiny improvement on the 31% that missed last month’s, July could see a massive increase as additional unemployment benefits of $600 per week are set to expire. At the moment evictions in some states are banned, but emergency legislation passed to prevent them is going to expire over the summer. Understandably there are plenty of people campaigning to have these measures extended for the duration of the crisis. There was the HEROES act that was passed in the House of Representatives, but has so far not been able to make it through the Senate; this has $100bn earmarked to help renters and a nationwide 12 month ban on evictions, which would seemingly be the obvious solution to this problem.

To today: We’ve already seen UK inflation data for May published, which shows a fall back to its lowest level in four years. Fuel is again the biggest driver of the fall, but clothing was close behind it as retailers are only just getting back open now. The fall takes us to 0.5% and means another letter from the Bank of England to the Chancellor – though imagine a 1 word post-it note saying “Covid” would suffice – The Bank of England are due to meet tomorrow to agree any tweaks to policy and though we’re not expecting a rate cut, we will expect another big increase in their QE programme size and maybe some other tweaks to try and get this inflation number on an upward trajectory.
Later on we get European inflation, US Housing data and also oil inventories; yesterday’s number showed an increase in stockpiles which pushed oil lower, so there will be a lot of attention on this data.

Be well.

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