Morning Brief – Tunnel vision

Tunnel vision

The coronavirus epicentre has migrated from Wuhan, Hubei province, through China, before migrating to Europe with Italy and Spain the best observable example of the exponential growth phase. The next epicentre of the coronavirus will be the United States having now recorded more confirmed cases than China. A fall in the number of cases reported in Italy in the last 24 hours to its lowest level in almost two weeks is being read as a positive sign of light at the end of the tunnel. In fact, the pan-European stabilisation in Coronavirus infection rates has prompted the World Health Organisation to conjecture that Italy and Spain’s outbreak may have peaked.

Daylight we see from the sun is about eight and a half minutes old having left our nearest star and taken this amount of time to race through space to our eyes. In more distant galaxies we observe pictures from millions (if not more) years ago as the light emitted from this distant region of space has taken that long to reach our planet. Delays in observation are apparent with the epidemic too with symptoms and potential hospitalisation arising around two weeks after initial exposure to the virus. Quarantine and lockdown which have been underway for as much time in Europe should begin to flatten the so-called curve and now measurably control the infection rate. The improving data in these beleaguered nations should be a signal of such an event.

So, what does the light at the end of the tunnel look like? In China, the economic machine has begun to burr once again. That’s not to say that the nation is back to full capacity and consumption – far from it. The threat of now imported new-strain coronavirus infection from abroad is considerable and as such the country remains far from full import and export capacity. Positively, soft data is beginning to reflect the improving coronavirus statistics. The Purchasing Managers’ Index – a widely recognised piece of survey data that collects responses from purchasing managers throughout the economy – has risen from a trough of 35.7 in February, when fear abounded, to 52 this month. A 50+ reading indicates expansion and improving conditions pointing to a fragile but recognisable improvement in the economic environment. With a (moderately) generous stimulus package in place to capitalise banks and promote lending and economic activity, the People’s Bank of China is also supporting economic recovery.

The United Kingdom, which began lockdown measures sometime after Italy and Spain having witnessed a slower spread of the disease, have yet to show evidence of curve control. This is not to say that the UK response has been inferior to those of Italy and Spain despite many criticisms levied to this effect. The rate of inflection and hospitalisation that a nation can support in addition to the spread which the virus has already recorded vary between populations demanding different responses. Nonetheless, positive signals for the UK observation rate and recovery rate must be recorded I suspect before investors turn bullish on the UK economy.

A quick update on South Africa: a downgrade to junk status in the nation has left the Rand trading at all-time lows versus many of its peers. The sell-off in the sovereign bond market leaves the domestic interest rate at unsustainably high levels as the country battles the outbreak of the virus. Social unrest and quarantine enforcement problems continue to undermine the South African economic outlook and ability of the government to finance the nation through this difficult time.

Discussion and Analysis by Charles Porter

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