Corrections are not Covid-19 carnage

Equities markets dip overnight

Financial markets suffered a bout of nerves overnight, as equities notably, eased inversely to Covid-19 concerns. The continuing spike in cases across the US Sunbelt states, along with a leadership vacuum from Washington D.C., frazzled investor nerves. Putting the falls in context though; the price action merely reflects a minor correction after a five-day winning streak for equity markets globally.

Indeed, the price action itself was actually quite limited in scale. US stock markets remain at or near record highs. By my estimates after a quick look at the S&P 500 charts this morning, it could fall 15%-20% from here and still be in a longer-term uptrend. Unfortunately, in this day of instant information dissemination, limited attention spans, a schizophrenic press and a life spent hooked intravenously to our smartphones, the tendency is to make mountains out of molehills. The falls seen yesterday look like molehills, driven by a sugar rush of information technology analysis paralysis.

The underlying driver of the biblical global asset market rally recovery is the same as post the Global Financial Crisis (GFC). Torrents of central bank monetary stimulus flooding the world’s economies. This time we also have an equally sharp dose of fiscal stimulus around the globe to help things along. Australia is preparing to roll out more of it, and overnight, President Trump was also contemplating throwing another trillion dollars on the fire.

In a nutshell, the world’s central banks have got investors backs. Any material falls in asset markets are likely to be met by even more of the same. The misallocation of resources, capital and the inequality it causes, would make a very long book and will be a price the world will have to pay back in the decades to come. The zombie apocalypse is already unknowingly upon us. But it will be in the form of zombie companies sucking up capital better used elsewhere, not undead humans trying to eat our brains. I’ll take the former thanks.

Having said that, I am increasingly concerned that the US has abjectly failed to manage its Covid-19 outbreak. The abject failure of leadership and social discipline of its people still threaten a double-dip in the Land of the Free. Unfortunately, when America catches a cold, the world catches the flu; that maxim has not changed. It does have the potential to delay and depress the world’s nascent recovery. It will, however, introduce some long overdue two-way price action into equity markets, in particular. The Robin Hood massive may have enjoyed stealing from the rich and giving to the poor these past months, but they should realise that the Empire can, and will, strike back.

On the currency front, the Hong Kong Monetary Authority (HKMA) has intervened at the low end of the band today. The HKMA has been buying US dollars at 7.7500 for most of the morning. This could lead to further speculating on the Hong Kong currency peg.

In Asia today, the data calendar is strictly second-tier and unlikely to provide much inspiration to the region’s investors. Markets will await tomorrow’s Japan Machinery Orders, China Inflation and US Jobless Claims. Of the three, the US number will be of most interest. Consensus suggests Initial Jobless Claims will hold steady at 1.5 million. However, if the number comes in much worse than expected, due to new lockdowns across the US Sunbelt, that may be all markets need to hit the sell button into the weeks’ end.

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