Coronavirus comeback or economic re-emergence, Which narrative will carry the day?

Markets are off the highs but far from the lows. Concerns about coronavirus have been weighing on a sentiment yet signs of a recovery are preventing falls. How are these narratives shaping up? Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss these two forces and what's next for markets moving forward.

Yohay Elam: Global markets and currencies are torn between two themes – signs of economic improvement and the unrelenting disease. The strong market rally has stopped, but it is unclear if this is a correction or rather a turning point. Perhaps let's start with the worries

Valeria Bednarik: Because it's unclear whether the worst of the coronavirus is over or not. Uncertainty is the main theme. All central bankers have mentioned it in their last meetings.. nobody is "safe" from high levels of uncertainty these days

Yohay Elam: The outbreak in Beijing triggered drastic containment measures and now authorities say it is under control. Do we believe that? I think their message creates more uncertainty, as you said, Val

Joseph Trevisani: I think what we see is habituation

Valeria Bednarik: And in turn, it generates uncertainty over when and how the economies will finally recover

Joseph Trevisani: That is the market threat potential of the virus is now much lower, even if the incidents, cases, and fatalities and hospitalizations rise. To put it more in the vernacular, its old news

Yohay Elam: China is the world's second-largest economy. If they impose restrictions on several large cities, will that trigger a more significant response?

Joseph Trevisani: I doubt it

Valeria Bednarik: But they didn't... in fact, they have closed some cities, but the news showed that economic activity was not restricted as in the first days of Wuhan

Joseph Trevisani: Markets are very much what have you done for me lately

Valeria Bednarik: The world is learning from COVID-19, both to deal with the disease and to handle economic growth

Yohay Elam: Measures are less blunt in Beijing

Valeria Bednarik: Not only about the virus. Authorities are learning the effects of keeping lockdowns for too long

Yohay Elam: Yet without overcoming the disease, the economy will never fully recover

Valeria Bednarik: Yups

Yohay Elam: Especially those dependent on services

Joseph Trevisani: Exactly, I think higher cases and hospitalizations are probably inevitable. The illness is nowhere near as dangerous as initially feared and medical systems are far more prepared

Yohay Elam: Medical systems are far more prepared, but the disease is quite deadly and debilitating. Long-term lung damage

Joseph Trevisani: Yes, for some, and certainly for the elderly, it is very dangerous. And I agree... its changes in social behavior will be with us and drag on economies until a vaccine or treatment is found

Yohay Elam: Dexamethasone sounds like a promising treatment, but the report that antibodies are not developed is depressing

Joseph Trevisani: Yes, I saw that a steroid of some type

Yohay Elam: How much are such health headlines significant for markets? Good and bad ones

Valeria Bednarik: So does plasma transfusions, but nothing is good enough. We need to wait for the vaccine or the virus miraculously weakening and disappearing. The market is a bit bored about this news, we all are. But as long as they have an effect on economic progress, there will be no choice but to take care of those headlines

Joseph Trevisani: The good ones seem to impact and the bad ones are ignored. Markets have been known to behave that way, very often. Equities, in particular, have their recovery scenario and they are sticking to it

Yohay Elam: They have their recovery scenario and lots of Fed funding. As well as a new breed of gambler investors, at least in smaller stocks. Perhaps as professional sports return, gamblers will return to waging bets on matches and not on markets

Joseph Trevisani: Haha I, as a former interbank FX trader, never considered myself a gambler, but a careful and considered market tactician. Markets always have had and always will an attraction for punters

Yohay Elam: That Hertz story was something. Returning to the topic of recovery vs. the virus. Do you think that if states or cities in the US impose restrictions, could it hurt markets? Or only weak data?

Joseph Trevisani: Sounds like a 1950s Japanese horror movie. I think reimposed restrictions especially business closures might have an impact. It will take a good deal of weak data, or not improving data, to change the equity recovery scenario

Valeria Bednarik: Both would have an impact, as weak data is only the reflection of restricted activity. The market would rush to price it in. Let's remember that we are always getting delayed data. These days we are seeing numbers for May, and even some from April. Those "bad news" doesn't have much of an impact, but if that situation extends into June and July, then, things will blow for sure

Joseph Trevisani: I agree. May's US retail sales were encouraging but only up to a point.  there was bound to be a burst of deferred spending, June and July will be far more telling. Which is one reason the initial claims numbers this week were important

Yohay Elam: Indeed. US jobless claims stabilized at previous levels, which are lower than the peak, but not pointing to a fast recovery

Valeria Bednarik: Yups. Continuing claims remain above 20m

Yohay Elam: Initial claims were for the week when NFP surveys are held, next week's continuing claims is for the same week. Perhaps next week's continuing claims could have a greater impact

Joseph Trevisani: The four-week moving average is 1.773 million. But even if cases in the US continue to rise the government will have difficulty reimposing restrictions because of the tolerance given to the many protests over the past several weeks. So it seems the country will have to learn to live with the virus until a treatment or vaccine is found

Yohay Elam: Indeed, it seems that big events are making a comeback, at least with current levels of covid stats that may change if things worsen, but perhaps that will take a few more weeks

Valeria Bednarik: In the meantime, what happens with the greenback? strong on risk-aversion, strong on positive data?

Yohay Elam: We are seeing a bit of divergence EUR > GBP

Joseph Trevisani: Risk-aversion is a proven commodity. When things are fearful the dollar rules. Risk-aversion has waned, last week the market extracted the remainder of the pandemic panic premium but we haven't returned to economic comparison either

Yohay Elam: Some of the euro's advantage over the pound can be attributed to the eurozone's advantage in defeating the disease and the faster reopening, but it is a small move and many other factors are in play. Brexit fears, EU fund hopes, today's BOE, etc

Joseph Trevisani: In the euro GDP tussle, Brexit should come back any day now

Valeria Bednarik: Ole good Brexit...

Joseph Trevisani: Quite nostalgic isn't it? A simple economic and political dispute

Valeria Bednarik: Yeah, I see more divergences when comparing European currencies with commodity-linked currencies. These last are usually more willing to run on risk-appetite scenarios. The burden seems to be less there, precisely with no Brexit, nor discussion on how to rescue troubled countries if grants or loans, etc

Joseph Trevisani: It is possible that the pandemic has made Brexit easier by taking it out of the spotlight

Valeria Bednarik: Yeah but, by year-end, the coronavirus crisis should be under control, and hopefully, the vaccine out. With that in mind, Brexit will re-surge quite timely

Joseph Trevisani: I hope so. It would bee a good sign of returning normality

Yohay Elam: Quite a twist from last year's fatigue from the Brexit saga, and we have the US elections coming up, talking about election polls is much better than death tolls

Valeria Bednarik: Oh yeah! fun awaits!

Joseph Trevisani: Well, it is sort of a deathmatch. There is far too much emotion on both sides. For the moment, I would give the President a small edge, but it is a very volatile election

Valeria Bednarik: Indeed, and lots of water will run under the bridge until that date

Joseph Trevisani: I am afraid 2020 will be one for the history books and it is only half over

Yohay Elam: Indeed, Trump has an electoral college advantage. He could win with an even greater popular vote deficit and the race is certainly wide open. US electoral campaigns are very long and things usually heat up after Labor Day

Joseph Trevisani: Yes, they are... in effect, they never stop. There are more than the usual number of moving parts this year, aside from the normal political rhetoric and disputes you have the protests, the rioting, the rise in crime in many cities,  the cultural and historical attacks and, if that wasn't enough, the pandemic and highest unemployment since the Depression. And two, to be discrete, unusual candidates.

Yohay Elam: Undoubtedly interesting, the elections will get attention in due course

Joseph Trevisani: In market terms, the choice is probably clear, with Trump being seen as better for the economy and equities, but that is only one part of a complicated political scene