Exposure rates of the Dorval Asset Management Range – 17th July 2020

Economic indicators are sending a clear message: moves to reopen economies – even partially – combined with unprecedented support packages are leading to a very robust recovery in consumer spending in developed countries, with retail sales again soaring 7.5% in the United States in June, making up for most of March’s and April’s losses (cf. chart 1). 

Meanwhile in China, GDP recovered 11.5% in 2Q compared with the first quarter of the year, and gained 3.2% vs. 2Q 2019. 


Retail sales display V-shaped curve in United States
base 100 in January 2020

Retail sales – excluding food services / Retail sales – total


The economic surprise index, which measures the difference between projections and actually published stats worldwide, posted a new all-time high this week (cf. chart 2). The process of upward revision to world economic activity that kicked off in June should thus continue, mainly as excessive pessimism had gripped most economists at the height of lockdown, often fearing that households would dissave only very cautiously, which does not seem to be the case.



Economic surprise indicator hits historic highs
World index compiled by Citi

However, uncertainties still remain. According to partial indicators, the surge in new Covid-19 cases in the south and west of the United States already seems to be having some effect on consumption in July. Projection models – which should always be taken with a pinch of salt – suggest that the current wave of the epidemic could reach a height at the start of August (cf. chart 3). If this is true and if only a very moderate reclosure of the US economy is required for the surge to ease, this would be very good news. The other piece of good news is that this outbreak of cases bolsters arguments from members of Congress who want to maintain support for both the jobless and households, and launch a massive stimulus plan. These measures are now supported by the US administration and are expected at the end of July.


United States could hit peak of new cases by mid-August
(model provided by Covid19-projections.com)


Europe will also have to stage this same juggling act between epidemic-related anxiety and stimulus programs, and the European Union Summit for Heads of State on July 17 and 18 will set the mood in this respect. Whatever the outcome, each European country will definitely have to work out some fresh stimulus plans in addition to the budget that the 27 countries are to set.


The markets have started to price in the reality of an economic recovery, as reflected by improved showings from cyclical and financial stocks over the past two weeks. However, much remains to be done, particularly as investor surveys continue to reflect fairly low confidence still. This relative caution is a fairly good sign as it suggests that a continuation in the economic recovery and/or better news on the pandemic could trigger fresh purchases in sectors that had been overlooked during the crisis.




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