The global stock market rally finally took a breather. After a positive start to the week, equities slowly rolled over before culminating in a precipitous single day freefall on Thursday. This was at the hands of a dour outlook from the Fed and resurgence in new coronavirus cases, fueling fears of a second wave of infections and the reinstatement of government lockdowns. Bonds ended the week slightly higher, with the 10-year treasury yield falling to 0.71%. Gold was also up.
S&P 500: 3,041 (-4.8%)
FTSE All-World ex-US (VEU): (-3.6%)
US 10 Year Treasury Yield: 0.71% (-0.19%)
Gold: $1,731 (+2.9%)
EUR/USD: $1.126 (-0.3%)
- Monday – House Democrats unveiled plans to overhaul policing laws in the wake of George Floyd’s death, with a focus on holding police offers more accountable for misconduct.
- Monday – The National Bureau of Economic Research announced that the US officially fell into recession in February.
- Tuesday – Texas reported two consecutive days of record COVID-19 hospitalizations.
- Wednesday – The US Federal Reserve held its policy meeting where it signaled it would not raise interest rates through 2022.
- Wednesday – US consumer prices fell 0.1% in the month of May, marking the third straight month of declines.
- Thursday – Weekly unemployment claims came in better than expected at approximately 1.5 million.
- Thursday – The average rate on a 30-year mortgage set a new record low, falling below 3%.
- Friday – The U.K. economy fell more than 20% in April.
This week’s pullback was driven by a couple of events. The first was the Fed’s policy meeting on Wednesday, where Chairman Powell struck a more cautious tone on growth expectations, suggesting there could be significant long-term damage to the economy and labor market. As a result, the central bank signaled it is likely to keep rates unchanged until at least 2022, and that it will essentially do everything in its power to help the economy regain its footing, including potential yield curve control.
But the more impactful event was news of fresh spikes in coronavirus cases in various locations around the country, including Florida, Texas, Arizona, and California, among other states. The increase in new cases comes as many of these states have begun reopening their economies, although at this point it is still unclear whether this is the root cause for the uptick. Either way, it is fueling fears that state and local governments could roll back or slow down the pace of their economic re-openings, which is causing investors to once again flee shutdown-sensitive risky assets.
The heightened volatility this week proves one thing: there is still a lot of uncertainty in how this all plays out. To some degree, an uptick in COVID cases was inevitable as economies reopen and more people interact with one another. The big question is how aggressive these resurgences become. If they remain relatively controlled and do not overwhelm the healthcare system, many states will probably continue with their reopening plans. But if they materially worsen, those locations could return to some form of full or partial lockdown. Moreover, we still don’t know the full impact of the recent mass protests, and there has always been risk of a second wave in the fall and winter. So this story is far from over.