Fathom Recovery Watch – 26.06.2020

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Headlines

• First wave accelerates through many US states and through South America
• No clear evidence yet of a second wave emerging
• Macro data continue to point to a V as lockdown restrictions ease
• China is already well into the V, as commodities are starting to illustrate
• Look out for May trade data for an indication of whether other countries will follow suit — US print is next week

Despite President Trump’s call for the US authorities to slow down testing, the number of daily cases of the virus in the US continues to rise. This should not be thought of, yet, as a ‘second wave’; rather, it is the continuation of the first wave as it ripples through many states that were previously largely unaffected. Something similar is true in many countries in South America: the first wave is still accelerating there (see for example the link below relating to Peru). In more positive news, those countries that have largely seen off the first wave (which includes China, South Korea, Japan and most European countries) have not yet seen any clear evidence of an emerging second wave — in spite of lockdown restrictions easing more or less everywhere. That does not mean there will be no second wave — but it is encouraging, nonetheless.

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As things stand, the UK is close to top of the league in terms of the number of COVID-19 related deaths per million of the population. The line is flattening, but at a depressingly slow rate. It is far from clear that countries like the UK, Belgium and a few others in the EU can safely declare the first wave over, even though restrictions on movement have been substantially relaxed already, with more to come next week. The total absence of social distancing over the last few days in places like Bournemouth beach suggests that if there is to be a second wave, we will start to see evidence of it in the next couple of weeks in the UK.

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There is no clear evidence of a V in backward-looking data for advanced economies yet. Electricity consumption, for example has crept upwards in most countries but remains significantly below its pre-crisis levels.

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However, with the first wave subsiding in many countries, and lockdown restrictions eased in most countries, some more forward-looking indicators are more positive. For example, the pressure on the corporate sector (measured in terms of the number of mentions of job losses or weak profits in corporate earnings reports) has also eased back, almost to where it stood before the crisis struck. This measures expectations about the extent of the damage to the corporate sector — and it confirms our central, V-shaped, scenario (although an L or something similar remains a material risk).

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A similar story is beginning to emerge from global commodity markets. Oil prices remain low, driven down partly by the impact of the virus and partly by a geopolitical struggle between Saudi Arabia and Russia. But other commodity prices have generally seen much less damage, and some are starting to register more bullish signals. That applies particularly to the Baltic Dry Index, which captures the price of shipping dry goods around the world.

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The Baltic Dry is up nearly 60% on the year, as demand for dry freight shipping starts to recover. Other commodities have also seen a bounceback from the lows recorded in March and April — and part of that earlier fall can be attributed to the risk-off flight into the dollar in the early days of the crisis. There is a long way to go before core commodities recover all of their lost ground, but their path so far again persuades us that a V is the right shape for our central case.

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Part of the reason for the signs of recovery in commodity markets is the early evidence of a V underway in China — the world’s principal consumer of most of those commodities. China’s industrial production grew by 4.4% year on year in May, almost back to its pre-crisis trend.

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The same cannot be said for global trade flows: at least, not yet. World exports collapsed in April and are likely to have remained low in May. They are now within a whisker of levels last recorded before the global recession of 2008/09.

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The May print for world trade will be important in gauging the likelihood of a V. US trade data are published next week.

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