Europe begins coronavirus backside response planning
Markets
As I write this, futures for the US market show another 3% rally in the offing at today’s open. This follows a 7% move yesterday and belies the pain in the real economy. And so, increasingly, I am seeing comments from market watchers asking how we reconcile the disconnect between markets and the real economy.
I am looking at standard technical analysis that saw 2620 on the S&P500 as the first bogey to hit on a bounce and 2780 as the 50% retracement target level. Yesterday, the US markets closed with the S&P500 at 2633. So we are getting closer to the 50% retracement level, after which the next target is a 61.8% level at around 2920. Until we hit that level, we can continue to believe the market is finding its legs, going through a technical bounce that has no meaning over the medium-term.
That’s how I am internalizing it. The disconnect is severe. But, the drop in shares was violent and now we are getting a garden-variety retracement. Only when that retracement is more than 61.8% i.e when the S&P500 hits 2920, should we think the downtrend is broken. That’s my view.
I thought I would start with markets since the price action is positive. I am still in the camp that says we have more downside to come. But I thought I would lay out the thesis.
Europe’s lockdown relaxation
One reason we can hope for upside in equities is because of what I mentioned yesterday about backside policy responses. I said we would see a (premature) lifting of lockdown. For this relaxation of lockdowns to be positive for the economy and equities, policy makers must be well-prepared for making sure the second infection wave remains small.
Our hope has to be that policy makers start now to develop backside policy responses that limit a second or third wave because that’s my best case outcome for physical, economic, and market health too. Greater and repeated testing for coronavirus in a coherent relaxation scheme is the best way to get the economy back up and running.
If we get this coherent relaxation scheme in any economy, it can serve as a model for others. And then, the economy can trend toward best case scenarios. It’s not a V-shaped recovery. But, because of the limited length of the economy’s drawdown, it might not count as a Depression either.
In the media yesterday, it was reported that several Western European countries are now going to attempt to relax their lockdowns. Denmark is the case to watch.
BBC: Denmark to start easing restrictions next week – re-opening nurseries and primary schools, Prime Minister Mette Frederiksen says.
— Edward Harrison (@edwardnh) April 6, 2020
“On Monday, Denmark’s Economic Council predicted a GDP contraction of only 3.5%, if output returns to normal quickly. That compares with the recent worst-case scenario painted by the central bank, for GDP to shrink as much as 10%.” https://t.co/GeLoguQYV0
— Edward Harrison (@edwardnh) April 6, 2020
Denmark was one of the first to lockdown, starting on 13 March. And this despite the fact that the first confirmed Covid-19 case was 27 February, more than 40 days after the US’s first case. And so, it makes sense that they are one of the first to attempt a relaxation too because their pandemic curve was flattened by an early response.
Denmark is going to start with primary and nursery schools and only move beyond that afterwards if the virus remains contained. Also note that a University College London study of respiratory viruses and school closures shows that school closure has a limited impact on preventing viral contagion (link here). So, again, it makes sense to start here.
Austria has also said it would relax restrictions. News from the UK – which is far from relaxation given its Prime Minister was admitted to the hospital yesterday – also shows preparations. The Times of London says an antibody test like the one from Italy I mentioned yesterday is more than a month away. But, it’s these kinds of tests we need to see to get a greater relaxation without fear of a second viral infection wave mushrooming.
My take
Although I would be cautious about reading too much into any of this, it is cause for optimism. I continue to believe that we are going to see a rolling wave of infection and lockdown, and that the worst lies ahead, particularly in the US. Nevertheless, I also believe we will see a rolling wave of lockdown relaxations. And the Danish example shows you that, after China, we are already there in Europe. Because Denmark did the right thing, they can exit early. And then they just have to hope doing so wasn’t premature. How Denmark gets on with this will be instructive for all of us.
I should also point out the juxtaposition to Sweden that never went into lockdown and, early on, mistakenly talked about herd immunity. Death counts from Covid-19 there are mushrooming. The fatality count stands at 591 now, up by 114 in the last day alone. They may actually go into lockdown late. And so, we’ll see how they fare as compared to Denmark. I believe they will fare poorly. But, they are a second example to watch.
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