Global markets are up nearly 40% off March lows, as countries ease restrictions on businesses and resume some level of economic activity. Although the rapid rebound in the equity market appears to price in returning to some sense of “normalcy,” the economic reality may be a gloomier picture, as many furloughed workers in sectors most directly impacted by the virus face the potential for permanent job loss and more businesses struggle to remain afloat as a result of the crisis. At the crux of this disconnect between economic data and stock valuations are growth stocks, which have proven resilient by being on the right side of behavioural changes that have occurred due to social distancing guidelines such as shopping online and watching streaming services. Prior to the crisis, value stocks had lagged growth stocks persistently, and they are likely to require clear evidence of economic improvement before they can stage a meaningful rebound. In the meantime, many investors continue to bet on growth stocks at the expense of cyclicals.
Relations between the U.S. and China have quickly turned fragile again amid controversy surrounding the coronavirus and China’s political influence on Hong Kong. Recent turmoil has reignited tensions that markets had hoped were resolved following last year’s Phase One trade deal. Recent escalations include U.S. sanctioning of Chinese companies, threats of breaches to the Phase One trade deal, and the U.S. suggesting it could remove Hong Kong’s special status. With the U.S. presidential election only months away, the Trump administration is likely to keep pressure on China and maintain a tough stance on trade as it angles for reelection. While markets ended 2019 hopeful that the relationship between China and the U.S. was mended, with the return of recent tensions, a more volatile environment for markets could lie ahead.
“Coronabonds” to the Rescue?
The European Union (EU) is planning to announce an unprecedented fiscal stimulus package worth as much as EUR 750 billion as the economic bloc attempts to lift itself out of recession. The package could consist of EUR 500 billion in loans and EUR 250 billion in grants, funded by issuing pan-European bonds. All members must approve the proposal, and as the details of the plan continue to be negotiated, resistance is expected from more austere members, such as the “Frugal Four”—Austria, Sweden, Denmark, and the Netherlands—who believe the recovery plan should be based solely on loans. Although this recovery plan marks an important step toward shared debt and fiscal ties among EU members, it is unclear whether the stimulus will be enough to lift the region out of this pandemic-led recession and what the longer‑term implications of the potential fiscal ties could be.
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