Exposure rates of the Dorval Asset Management Range – 24th July 2020

After the world economy was shut down to safeguard populations’ health – and subsequently partially reopened – we are now undergoing a new phase when we have to learn to live with the virus until such times as vaccines are produced.

However, the various geographical regions are not all having exactly the same experience of this period.


Europe is coming out better than the United States for now in terms of the pandemic (cf. chart 1). Despite some clusters here and there, which are tackled by targeted further lockdown measures, the trend to reopening economies in Europe is not in jeopardy.


Covid-19-related deaths per 100,000 inhabitants

Per 100,000 inhabitants / United States / Italy


However, several states in the US, including California, have had to partly shut down their economies again, which has particularly put the brakes on the recovery in consumer spending (cf. chart 2).


The latest “official” statistics for July on both sides of the Atlantic confirm this divergence (cf. chart 3).


Europe has the advantage in July

Euro area – Services PMI
US – new weekly jobless claims


Fiscal policy is another area where the two regions differ. On one hand, European Union member states have now hashed out a €750 bn support program financed via bonds that the bloc will issue on its own behalf, in a political breakthrough that will provide visibility for European fiscal stimulus for several quarters to come. On the other hand, political polarization in the United States just a few months ahead of a hotly disputed presidential election is muddying the waters considerably. Democrats and Republicans must agree on a fresh recovery plan before the end of July if they want to avoid another fiscal cliff. The situation in the country – both in terms of the pandemic and the economy – advocates for a compromise, but visibility remains hazy.


Against this backdrop, the euro’s exchange rate to the dollar broke through the 1.16 mark and the most adventurous economists are now expecting a return to around 1.20-1.25 on a 6-12 month timeframe, at purchasing power parity rates (cf. chart 4).


The start of a new EUR/USD cycle?

Purchasing power parity exchange rates (OECD)


Over the past few weeks, we have seen an escalation in US/China diplomatic tension and this strategic rivalry between the two superpowers is part of a long-term trend that will probably also stretch into the US election period in November. However, looking back to 2018 and 2019, experience shows that hikes to border duties are the most costly factors for the world economy and the markets (cf. chart 5). So for such times as tension remains limited to diplomatic aspects, it is difficult to assess any direct potential impact on the economy, corporate profits and the financial markets.


US/China rivalry

Relative performance for a basket of international stocks exposed to China vs. MSCI World (2018 = 100, RHS)
US border duties on Chinese imports (LHS)



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