Global Markets Stall as Future Remains Uncertain

In this era of big and bigger numbers, the size of the US budget deficit – $864 billion in June – dwarfs all else. In a single month, the US Treasury overspent about the same amount as the entire post-corona recovery package the European Union is bickering about. The US deficit, almost a trillion dollars in 2019, tripled in the first nine months of the 2020 fiscal year and is expected to keep growing at a brisk pace for a few more quarters yet.

Next Monday, Congress reconvenes to consider add-ons and extensions to its earlier rescue packages. The optimism that the recession would be short-lived and V-shaped has mostly evaporated with Republican lawmakers hitting the mute button after crowing victory and ‘mission accomplished’ too soon – a trait that has now become a GOP hallmark.

Wall Street is preparing for a dismal earnings season with average quarterly EPS (earnings per share) growth of S&P 500 corporations nosediving to minus 45 percent. The most recent precedent of such a steep decline was Q4 2008, just after the epic fail of Lehman Brothers when EPS plunged to minus 69 percent. That heralded the start of the Great Recession which reverberated throughout the decade that followed.

In fact, an argument can be made that the Great Recession never really came to a close since any growth that followed was not organic but the product of quantitative easing and other financial stimuli to goad the economy to show signs of life. One of the (many) differences between then and now is that a growing number of companies no longer issue a formal guidance on profits, leading to an information blackout that is almost unprecedented. The reason for this corporate silence is, of course, that given the uncertainties introduced by the pandemic, the ominous seesawing of ‘the curve’, and the absence of leadership, no-one knows what’s in store – if anything.

Meanwhile, analysts are all over the place – and nowhere. Never before has the gap between their highest and lowest estimates been wider. When PepsiCo on Monday kicked off the earnings season, reporting only a modest 3 percent drop in net revenue and an 18 percent EPS retreat, some analysts were excited whilst others dipped into gloom. There was no agreement on the significance of the numbers.

Quoted in the Financial Times, Chief US Equity Strategist Jonathan Glub revealed that he is focused on relative corporate performance as opposed to the absolute numbers: “The story of the [reporting] season is going to be who’s able to come through this crisis better than others.”

Reflecting the growing realisation that the Corona Recession may not be as short-lived as expected initially, investors have taken a breather after pushing the market to a remarkable high. With the current price-to-earnings ratio of the S&P 500 hovering north of 22, well above the five-year average of 17, gains have stalled as investors worry about rising corporate debt levels and plummeting revenues. Though credit flows smoothly and abundantly, analysts suspect corporations may be relying too heavily on the prospects of a quick recovery that is unlikely to materialise.

This may help explain why the Trump Administration has declared a war of words on the venerable Dr Anthony Fauci, the leading advisor to the White House coronavirus task force, whose unwelcome comments are seen by some officials as alarmist and undermining the president’s efforts to open up the US economy. Dr Fauci is worried about the slope of the curve which he called ‘exponential’. He also warned that, before long, the country may tabulate 100,000 new infections a day, a scenario that is panning out almost to the letter.

Even the most ardent Republican state governors are now beginning to have second thoughts and have begun beating a retreat from their previous the-devil-may-care attitudes in the face of mounting infection rates and rising death tolls.

Global stock prices are slipping in response to the re-imposition of lockdown measures in Texas, Arizona, and California. Though most investors can live, for now, with lower corporate earnings, they are less sanguine about the near future and fear a second hit to economic activity. Investors are also leaving China in droves pulling out $2.5 billion on Tuesday morning alone, according to data supplied by Bloomberg.

US Secretary of State Mike Pompeo didn’t help boost market sentiment when he announced that his country will ‘push back more forcefully’ against China’s territorial claims in the South China Sea. For the first time since 2014, the US has dispatched two carrier groups to ensure freedom of navigation. This week, the People’s Liberation Army is conducting exercises in the waters surrounding the disputed Paracel Islands, a Chinese-occupied archipelago claimed by both Taiwan and Vietnam.

On Tuesday, Beijing upped the ante by slapping sanctions on US defence contractor Lockheed Martin for supplying a $620 million upgrade to Taiwan’s Patriot surface-to-air missile systems. China’s foreign ministry also rejected Mr Pompeo’s assertion that the country seeks to establish an empire in the South China Sea. Earlier this month, Foreign Minister Wang Yi said that China-US relations have deteriorated to a low not visited after both countries re-established diplomatic ties in 1979.

In an unusually frank moment, Mr Yi admitted that tensions over Taiwan, Tibet, and a range of other issues could ‘torpedo’ progress on a new trade deal with the US. Though he said that Beijing is eager deescalate tensions, Mr Yi also indicated that his country will not abide to ‘limits’ set by the US.

Whilst the pandemic rebounds in the US, holds Latin America in its grip, and acerbates tensions in the European Union, the last thing the world needs is a clash of superpowers. That would be the only bit missing from the ‘perfect storm’ predicted and feared by Dr Fauci.

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