Latest G10 Macro Rates Blog
With Shayne Dunlap, Co-Portfolio Manager
Humans have an innate ability to hope – to believe things will be better in the future than they are currently. This has been an important factor in our species surviving and ultimately thriving as the dominant one on this planet. It also has the side effect of manifesting itself in the financial markets.
The month of May was all about hope, that a vaccine will come soon, that there will be no second wave of infections as lockdown is unravelled, that purchasing demand will bounce back quickly on all that pent-up enforced isolation. The equity markets again took it upon themselves to carry the torch of hope, with the S&P500 swiftly recovering 70% of the dramatic Feb/March sell off. Unfortunately hope needs to ultimately be confirmed by reality, and in this instance, it will probably be lacking.
The actions of central banks and governments have been laudable, relatively swift, and gargantuan in scale. However, the challenge faced is complex, larger still in monetary terms, and subject to behavioural change in living and working habits that may prove to be a watershed moment in the history of Keynesian economics. The side effect of striking fear into a population, fear of mass death and fear to follow the strict rules and guidelines of lockdown, is that the fear lingers on. The economies that have reopened are not seeing their workers rush back, nor are they seeing spending habits recover anywhere near those previously. Workers are not returning to offices that are inadequately designed for social distancing, and certainly trying not to commute by public transport. Fear of the legal minefield open to interpretation of “knowingly placing your employees’ in danger” might be appropriate for the medical and military professions, but not to the average employer. It will take many months yet, to prepare or amend working practices, environments, and schedules to fulfil the comfort blanket now required.
Daily doses of hopeful news on vaccine miracles are prone to subsequent retraction or delay. I do worry that should a wonder drug appear, and I am thinking 2021 at the earliest, that there will be much disagreement about what is a “fair” commercial pricing scale, and how it is applied to which countries. I also suspect the most powerful nations try to dominate supply of the billions of vaccine vials needed, to themselves first. This opens a can of ethical worms on a global scale.
The biggest issue probably comes to a head in late Q4 when many furlough and SME loan programs are currently due to expire. This is when national treasurers must make the unenviable choice between extending those programs and invoking another round of significant increases in national debt, or potentially subjecting the “old business world” to a new economic landscape that may not sustain a significant number of them. This will be a tough process and volatile period for politicians and market participants alike.
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