by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT]

The rally in risk assets around the globe today comes as coronavirus restrictions continue to be lifted around the world, economic activity starts to increase again, and more potential vaccines make their way into trials.  So far today, those bright spots are offsetting the continued risk of second waves of the pandemic and renewed U.S.-China tensions.

COVID-19:  Official data show confirmed cases have risen to 5,519,878 worldwide, with 346,836 deaths and 2,253,651 recoveries.  In the United States, confirmed cases rose to 1,662,678, with 98,223 deaths and 379,157 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Novavax, Inc. (NVAX, 46.11) began a small Phase I study of its coronavirus vaccine candidate NVX-CoV2373, joining the frontrunners in the race to develop a vaccine.  The company expects to have results as early as July.
  • To speed production if the vaccine proves to be safe and effective, the firm is already preparing its production facilities.
  • Because of the manufacturing buildup, Novavax said it could produce up to 100 million doses this year, and potentially more than one billion in 2021.
• Tests on coronavirus-infected health workers in two French hospitals show that 98% of them maintained strong immunity a month later, a finding that will help ease concerns that COVID-19 immunity is not durable.
• In a more negative report, Brazil has now become the only country besides the U.S. in which more than 1,000 people are dying each day from the coronavirus, with Mexico close behind.  The figures underline this risk that infections will surge further in poorer countries that haven’t been able to maintain a prolonged lockdown for economic or political reasons.  That’s bad news because burgeoning infections in poorer countries will make it harder for developed countries to avoid a second wave of infections in the future.

Real Economy

• High-frequency economic data from truck loading to air and hotel bookings show the U.S. economy is reactivating, albeit slowly and fitfully.  The growing sense that an economic recovery is in the works here at home and abroad appears to be a key reason for the risk-on attitude in today’s markets, along with the continued news on coronavirus vaccine development.
• Major U.S. sports leagues are preparing to restart their seasons over the summer, potentially helping a wide range of ancillary employees – from hot dog hawkers to cheerleaders – get back to work.  Importantly, the return of sports would also provide fresh content for major media firms.
• Analysts at Barclays estimate economic activity in the U.K. for the week starting May 11 returned to almost 80% of normal, driven by higher retail sales both online and offline.
• All the same, new infection hotspots are already popping up in some European countries that have eased their lockdowns, raising the risk that restrictions might have to be tightened again.  Italian officials threatened to reinstate restrictions on people’s movements and announced plans to recruit 60,000 unemployed volunteers to help oversee social distancing, after hordes of Italians celebrated the end of the country’s lockdown by going out in public.
• The Organization for Economic Cooperation and Development said the combined gross domestic product of its 37 members was 1.8% lower in the first quarter than in the final three months of 2019, the largest fall since the 2.3% decline recorded in the first three months of 2009 during the height of the financial crash.
• A Dutch body considered an authority in world trade, CPB Netherlands Bureau for Economic Policy Analysis, said flows of goods across borders were 1.4% lower in March than a month earlier, bringing the decline in the first quarter to 2.5% – the largest drop since the Global Financial Crisis.
  • WTO economists estimate flows will fall by 13% to 32% in all of 2020, compared with 33% over three years during the Great Depression.
  • The declines reflect the vast interdependencies between world economies, which is forcing many firms to consider diversifying and shortening their supply chains.
• In the U.S., it’s also becoming increasingly clear that the mortgage forbearance rights in the CARES Act come with a slew of unintended negative consequences that have the effect of tightening lending standards for new mortgages.  Tighter mortgage lending would likely retard the rebound in the economy as lockdowns ease.

Financial Markets

• Investors are gearing up for more emergency share sales from British companies trying to shore up their balance sheets or build acquisition war chests as the pandemic leaves businesses fighting for survival.  According to PrimaryBid, a group that links retail shareholders with companies, more than 50 companies in the UK have raised approximately £7 billion through equity placings in the past two months alone.

Foreign Policy Responses

• The German government and Deutsche Lufthansa (DLAKY, 8.82) agreed on a €9-billion bailout deal—one of the biggest aid packages by a single country hatched so far in the pandemic-hit air travel sector.
• The People’s Bank of China set a daily midpoint for the renminbi at 7.1293 per dollar, marking the currency’s weakest value since February 2008.  The setting suggests the Chinese government now wants a weaker currency to help offset weaknesses caused by the coronavirus pandemic, trade tensions with the U.S., and the limited scope for additional debt financing.  The lower currency risks further stoking tensions with the U.S.

Political Impact

• Prime Minister Johnson has come under fire after news reports showed his top political advisor, Dominic Cummings, took a 260-mile road trip to his parents’ farm shortly after the rest of the country was placed in lockdown.  Cummings’ refusal to apologize has already sparked the resignation of at least one lower-level minister in the government.

China-Hong Kong:  Pro-democracy demonstrators filled the streets of Hong Kong again over the weekend to protest Beijing’s plan to impose a new national security law on the city, sparking clashes with police.  To reassure investors, President Xi insisted the legislation was benign, and China’s foreign ministry commissioner in the city said it would ensure “a more law-based, reliable and stable business environment for foreign investors.”  However, the proposal is still stoking investor concern that the legislation could undermine the rule of law in Hong Kong and produce a more politicized economic and financial system under Beijing’s thumb.   The crackdown on Hong Kong could also signal that President Xi will eventually take an even tougher stand on reunifying Taiwan with China, even as he pushes to gain Chinese control over the East China and South China Seas.  All of these aggressive initiatives, along with efforts to coopt countries ranging from the Philippines to Italy, carry the risk of U.S. sanctions, financial market decoupling, or, eventually, military clashes.  They also exacerbate other U.S.-China tensions ranging from trade relations to disputes over whether China is to blame for the coronavirus pandemic.  Hong Kong stocks have already been hurt by the proposed security law, but the worsening relationship between the U.S. and China also presents a risk to global stocks in the longer term.

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