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Well, Hello Again ??

11 June 2020 by jbchevrel

It’s not about the Fed anymore. Evidence of 2nd wave in many regions has become more tangible. Our market widens today on concerns about a new wave of coronavirus infections in some US states and, to a lesser extent, the Fed signaling yesterday that the economic outlook for 20/21 was very uncertain didn’t help. The price action is reminiscent of March. CDX IG is wider by +7, CDX HY is wider by +50 and CDX EM is wider +30. The market was too complacent about this possibility and the commodity-exporting companies and countries are suffering. Over the past few sessions, names like Glencore, Colombia, South Africa have retraced between +40 and +50 bp. Today WTI came as low as 35.5 after topping 40.5 late last week. Data from Johns Hopkins show an uptick in cases in Florida, Texas and California, raising fresh alarms about a 2nd wave of infections that could lead to a revival in lockdowns on social and business activity. The VIX climbed to its highest level in a month (37) and S&P futures have slided about 250 points from Q2 highs (2990). Supposedly not a great day for retail punters in the US! In the UK, TV doctor Dr Hillary Jones has warned that we could suffer a 2nd wave too. And the timing is basically now. He told ITV's Lorraine Kelly this morning that if the UK sees a 2nd spike at all, it will happen this month. Some EM countries have never past the 1st peak of infections. It is arguably the case of Brazil, but also India and Russia. Iran has reported 2,000+ new daily COVID cases for the past 2 weeks. That spike in confirmed cases gave assurance that a 2nd wave was possible in the West as well. This was the result of 3 factors: 1/ an erosion of public trust 2/ testing delays and 3/ lockdown restrictions rolled back too soon.On the monetary side of the equation, we just had FED/ECB meetings. Despite the CBs being assertive about their willingness to act to support the economies, we have gone far from the levels of credit spreads / asset prices where they will feel an urgency to step up an already-unprecedented stimulus. On the fiscal side of the equation, all the good news seem to be in the price, at this juncture. Today it was reported that the White House and the GOP were pushing coronavirus-linked relief talks to late July. In the meantime, our market has plenty of room and time to readjust to the reality of COVID.