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Mid-year outlook 2021 – What comes after the pandemic?

Investors’ views on the outlook for growth have gone from acceleration to anticipation of the coming peak, while on inflation, expectations have moved from a pickup – transitory or otherwise – to concern that central banks might appreciate an overshoot…

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Investors’ views on the outlook for growth have gone from acceleration to anticipation of the coming peak, while on inflation, expectations have moved from a pickup – transitory or otherwise – to concern that central banks might appreciate an overshoot of their targets less than previously thought.


This is an extract from our mid-year outlook


The pandemic, of course, is not over as evidenced by the race between governments’ vaccination pushes and the spread of often more infectious variants. A Covid variant that is resistant to current vaccines, and the re-imposition of lockdowns that could entail, is one of the key risks to our outlook.

FIXED INCOME – US

Two factors will determine the path of US Treasury yields:

  • The persistence of recent inflationary pressures
  • The timing of steps by the US Federal Reserve to taper its support for the US economy.

The outlook for the US labour market will be a key determinant of whether price increases persist. As generous fiscal and monetary policy support return the economy to full employment in the first half of 2022, we expect the job market to go back to generating solid wage gains of around 3.5% a year, resulting in a period of persistent, cyclical inflation.

How will the Fed react? We believe that while an inflation overshoot may be an objective, there is no commitment to it. If the Fed is less tolerant of inflation overshoots, there are several implications:

  1. A more hawkish Fed weakens the rationale for pricing an inflation overshoot into longer bond maturities, or an inflation risk premium. So, 10-year breakeven rates should be closer to 2.3% than 2.6%, and longer-dated nominal Treasury yields should be lower.
  2. To head off upside inflation risks, policy would be normalised more quickly: Asset purchases are wound up sooner; rate rises come earlier and less gradually. So, there is more upside to the front end of the yield curve.
  3. Markets will become increasingly sensitive to employment and inflation data as investors look for progress towards the conditions for tapering of the quantitative easing (QE) to begin.

The primary risk to this outlook is the rapid spread of the Delta variant. This could unsettle investors and support a bid for Treasuries.

We expect QE tapering to start in early 2022 and rates to be raised from March 2023. 

FIXED INCOME – eurozone

With an improving labour market and strengthening sentiment, the recovery in eurozone demand will likely pick up in the coming months. Additional support should come from the extension of government fiscal responses and spending from the Next Generation EU (NGEU) fund.

Eurozone inflation will likely breach the ECB’s 2% target amid near-term supply shortages and bottlenecks, and positive impacts from the economic reopening. In the longer term, however, we expect spare economic capacity and a downward shift in inflation expectations to weigh on inflation.

Slower QE asset purchases by the ECB amid improving economic activity should cause yields to rise, but net negative bond issuance, thin trading liquidity and growing concerns about the spread of the Delta variant should contain yields. 

On ‘peripheral eurozone bonds’, slower asset purchases by the ECB will likely reduce central bank demand for these bonds. Concerns over the upcoming elections in Germany and France leading to risks to the pro-European agenda will also not be favourable to this segment.

EQUITIES – Style and size

We expect equities broadly to rise given the solid earnings outlook, but see more variation in the returns between countries, sectors and styles depending on moves in interest rates.

For US value stocks, returns have been poor since mid-May as expectations for economic growth and inflation plateaued. Factors supporting value outperformance from here include the delayed reopening of the economy: the expected earnings recovery will now play out over a longer period. Earnings expectations should thus rise for longer.

Valuations also favour value stocks. The largest sectors in growth indices have high valuations, not just tech but also healthcare and industrials, while they are less elevated for the main components of the value index.

Restrained inflation expectations could limit the outperformance of US small-cap stocks. A peak in growth typically limits small-cap outperformance, while strong returns of mega-cap tech stocks boost the larger cap indices. European small caps may see more upside given that the cyclical momentum should be sustained for longer in Europe as the region’s economies reopen more slowly.

EQUITIES – Geographic allocations

US equities should modestly outperform European equities through the rest of the year. Aiding the US is a much stronger growth outlook thanks to greater willingness to remove lockdown restrictions, better progress on vaccinations, and the benefits of fiscal stimulus.  US equities are admittedly expensive compared to those in Europe, but superior US earnings growth typically overcomes this barrier.

Europe has the Next Generation EU funds to look forward to. The recovery in European earnings has lagged that in the US, though much of this is due to (as things often are) to the dominance of the US tech sector. Consequently, European equities have more room to catch up.

More cyclically oriented countries such as Japan and emerging markets should outperform. EM equities were historically more value oriented, but the growing weight of China in the EM index means the growth style has come to dominate. Recently, however, China has been a drag on overall EM performance as Beijing stepped up its scrutiny of the country’s tech companies and as corporate bond defaults rose.

We nonetheless expect China’s tech sector to recover given its strategic importance and excellent medium-term growth prospects. As vaccination rates rise, a fuller reopening should allow corporate earnings growth to accelerate broadly across emerging markets.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Daniel Morris. The post Mid-year outlook 2021 – What comes after the pandemic? appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Spread & Containment

China Suspends Travel, Ramps Up Testing As Delta Outbreak Hits Wuhan

China Suspends Travel, Ramps Up Testing As Delta Outbreak Hits Wuhan

China’s worst outbreak since COVID first emerged in the city of Wuhan has continued to spread, prompting authorities to intensify their efforts to crush the delta-driven…

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China Suspends Travel, Ramps Up Testing As Delta Outbreak Hits Wuhan

China's worst outbreak since COVID first emerged in the city of Wuhan has continued to spread, prompting authorities to intensify their efforts to crush the delta-driven outbreak. However, as the virus continues to elude their grasp, it's looking increasingly likely that Beijing's "zero tolerance" approach might hamstring economic growth, as analysts from Goldman Sachs warned in a recent note to clients.

More than 2 dozen cities have counted more than 300 cases over the past few weeks as the number of cases has quickly multiplied. China now has 144 medium- and high-risk areas - the most since the initial outbreak in early 2020, according to the National Health Commission.

By Monday, all of China's 31 provincial-level jurisdictions had issued notices by Monday advising people not to travel domestically. Some provincial governments singled out only medium- and high-risk regions, while others asked people to avoid all inter-provincial travel. According to the SCMP, Beijing's "zero-tolerance" approach to fighting COVID, which remains minimal compared with China's vast population, has "scared away" the tourists.

China reported 71 new COVID cases from local transmission on Wednesday, more than half of them in coastal Jiangsu province near the epicenter of Nanjiang, AP reported.

The CCP has decided to expand travel restrictions on Wednesday: ride-hailing services and public transit have been suspended in all medium- to high-risk areas. Immigration authorities have promised to "strictly restrict non-urgent, unnecessary cross-boarder travel" including restricting the issuing of passports for Chinese citizens. To try and stifle the virus before it has an opportunity to take hold, the city ordered millions of residents to undergo mandatory testing, leading to lines forming across the city. The city has also closed 17 bus lines and a handful of subway stations. Cases have been confirmed in 17 provinces and some two dozen cities, including Wuhan, which reported a handful of cases this week, per CNN.

Fears of another crushing lockdown - many Wuhan residents still have PTSD from the 70-day+ lockdown in the city that was used to crush the original outbreak, at a tremendous cost to the city's residents mental and physical health. Videos and photos shared on social media have shown empty shelves and long lines at supermarkets, as residents scramble to stock up on supplies.

"Seeing Wuhan people panic buying at supermarkets makes me feel sad. Only those who have experienced it understand how terrible it is, (we) dread a return to the days of staying at home and not knowing where the next meal is," said one Wuhan resident on Weibo.

The present outbreak began a little over a week ago in Nanjing, a city in Jiangsu province in eastern China, where nine airport cleaners were found to be infected on July 20 during a routine test. Chinese authorities have blamed the cluster on workers from Russia, who arrived at the Nanjing Lukou International Airport on July 10.

"It is believed that the cleaners did not strictly follow anti-epidemic guidelines after cleaning Flight CA910 and contracted the virus as a result. The infection further spread to other colleagues, who are also responsible for cleaning and transporting garbage on both international and domestic flights," reported state news agency Xinhua.

Given the provenance of the latest outbreak, Beijing has committed to ramp up testing of transport workers around the country. Workers at ports and borders considered high risk will be tested for the virus every other day said Li Huaqiang, a senior official with Ministry of Transport.

Earlier this week, another COVID-19 hotspot was identified in the city of Zhangjiajie, near a scenic area famous for sandstone cliffs, caves, forests and waterfalls.

Despite only confirming some 19 cases over the past week, the city ordered residential communities sealed Sunday, preventing people from leaving their homes. In a subsequent order on Tuesday, officials said no residents, and no tourists, would be allowed to leave the city. On Wednesday, the city government's Communist Party disciplinary committee issued a list of local officials who "had a negative impact" on pandemic prevention and control work who would be punished.

Far higher numbers were reported in Yangzhou, a city next to Nanjing, which has recorded 126 cases as of Tuesday. As a result, all cross-city ferry services, water tours were suspended in eastern Yangzhou on Wednesday.

But most alarmingly, the outbreak has already touched Beijing, eve though it's thousands of miles removed from the epicenter in Nanjiang. On Wednesday, 7 cases were confirmed in the capital city, prompting authorities to lock down two residential compounds.

As of this wee, China has doled out more than 1.71 billion vaccine doses to its population of 1.4 billion. Officials say 40% of the population is fully vaccinated, but the outbreak is also raising questions about the efficacy of those vaccines.

Tyler Durden Wed, 08/04/2021 - 18:00

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Government

Broward County Public Schools “Pause” Proposed Mask Mandate After DeSantis Threatens To Cut Funding

Broward County Public Schools "Pause" Proposed Mask Mandate After DeSantis Threatens To Cut Funding

Update: Broward County schools on Aug. 3 again changed course on whether to comply with or defy an executive order by Republican Gov. Ron…

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Broward County Public Schools "Pause" Proposed Mask Mandate After DeSantis Threatens To Cut Funding

Update: Broward County schools on Aug. 3 again changed course on whether to comply with or defy an executive order by Republican Gov. Ron DeSantis which prohibited schools from imposing mask mandates on students.

In a written statement to The Epoch Times, the school board has not changed its policy but “paused it.”

“In light of the governor’s executive order, the district is awaiting further guidance before rendering a decision on the mask mandate for the upcoming school year. At this time, the district’s face covering policy, which requires the use of masks in district schools and facilities, remains in place.”

The School Board plans to discuss next steps at a special meeting on August 10.

Dr. Vickie Cartwright, interim superintendent of Broward County schools is looking into the executive order further.

“The school board is reviewing information and looking for language from our executive rules as a result of the governor’s executive order,” Cartwright said in a video statement.

On July 30, the governor signed an executive order that protects parents’ right to make decisions regarding the masking of their children as a means of protecting them from COVID-19. A month earlier, he signed a bill that protected the parents’ “fundamental right” to make decisions for the upbringing, education, health care, or mental health of their minor children.

“Many Florida schoolchildren have suffered under forced masking policies, and it is prudent to protect the ability of parents to make decisions regarding the wearing of masks by their children,” DeSantis said.

*  *  *

As we detailed earlier, Florida Governor Ron DeSantis has had enough of the Covid hysteria.

Aside from going on record and calling the lockdowns a "huge mistake" back in April of his year, DeSantis has done everything he can to try and turn over the power in his state to its citizens, and away from the government.

The latest example of this comes this week, where DeSantis stood down Florida's second largest school district that was attempting to impose a mask mandate. In response, DeSantis threatened to withhold funding from the district. 

"Broward County Public Schools announced last week that it would require mask use after the CDC issued new guidance recommending universal indoor masking for all teachers, staff, students and visitors to K-12 schools this incoming school year, regardless of vaccination status," Axios reported this week.

DeSantis had issued an executive order last Friday barring schools from requiring masks when school re-opens next month. His order read that "if the State Board of Education determines that a district school board is unwilling or unable to comply with the law, the State Board shall have the authority to, among other things, withhold the transfer of state funds, discretionary grant funds ... and declare the school district ineligible for competitive grants."

And that's exactly what DeSantis threatened to do before Broward County Public Schools backed down, releasing a statement on Monday that said: "Broward County Public Schools intends to comply with the governor's latest executive order."

The statement continued: "Safety remains our highest priority. The district will advocate for all eligible students and staff to receive vaccines and strongly encourage masks to be worn by everyone in schools."

DeSantis also spoke at a press conference this week, stating: “Even among a lot of positive tests, you are seeing much less mortality that you did year-over-year. Would I rather have 5,000 cases among 20-year-olds or 500 cases among seniors? I would rather have the younger.”

“We are not shutting down. We are going to have schools open. We are protecting every Floridian’s job in this state. We are protecting people’s small businesses. These interventions have failed time and time again throughout this pandemic, not just in the United States but abroad.”

As we noted back in April, DeSantis told The Epoch Times that the lockdowns were a “huge mistake,” including in his own state.

“We wanted to mitigate the damage. Now, in hindsight, the 15 days to slow the spread and the 30—it didn’t work,” DeSantis said.

“We shouldn’t have gone down that road.”

Florida’s lockdown order was notably less strict than some of the stay-at-home measures imposed in other states. Recreational activities like walking, biking, golf, and beachgoing were exempted while essential businesses were broadly defined.

“Our economy kept going,” DeSantis said. “It was much different than what you saw in some of those lockdown states.”

DeSantis has also opposed vaccine passports in Florida. 

Tyler Durden Wed, 08/04/2021 - 22:40

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Spread & Containment

‘For $1/Day’… Double-Blind Ivermectin Study Reveals COVID Patients Recover More Quickly, Are Less Infectious

‘For $1/Day’… Double-Blind Ivermectin Study Reveals COVID Patients Recover More Quickly, Are Less Infectious

A double-blind Israeli study has concluded that Ivermectin, an inexpensive anti-parasitic widely used since 1981, reduces both…

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'For $1/Day'... Double-Blind Ivermectin Study Reveals COVID Patients Recover More Quickly, Are Less Infectious

A double-blind Israeli study has concluded that Ivermectin, an inexpensive anti-parasitic widely used since 1981, reduces both the duration and infectiousness of Covid-19, according to the Jerusalem Post.

The study, conducted by Prof. Eli Schwartz, founder of the Center for Travel Medicine and Tropical Disease at Sheba Medical Center in Tel Hashomer, looked at some 89 eligible volunteers over the age of 18 who had tested positive for coronavirus, and were living in state-run Covid-19 hotels. After being divided into two groups, 50% received ivermectin, and 50% received a placebo. Each patient was given the drug for three days in a row, an hour before eating.

83% of participants were symptomatic at recruitment. 13.5% of patients had comorbidities of cardiovascular disease, diabetes, chronic respiratory disease, hypertension or cancer. The median age of the patients was 35, ranging from 20 to 71-years-old.

Results

Treatment was discontinued on the third day, and patients were monitored every two days thereafter. By day six, 72% of those treated with ivermectin tested negative for the virus, vs. 50% of those who received the placebo. Meanwhile, just 13% of ivermectin patients were able to infect others after six days compared to 50% of the placebo group - nearly four times as many.

Hospitalizations

Three patients in the placebo group were admitted to hospitals for respiratory symptoms, while one ivermectin patient was hospitalized for shortness of breath the day the study began - only to be discharged a day later and "sent back to the hotel in good condition," according to the study.

"Our study shows first and foremost that ivermectin has antiviral activity," said Schwartz, adding "It also shows that there is almost a 100% chance that a person will be noninfectious in four to six days, which could lead to shortening isolation time for these people. This could have a huge economic and social impact."

The study, which appeared on the MedRxiv preprint server and has not yet been peer-reviewed. That said, Schwartz pointed out that similar studies - 'though not all of them conducted to the same double-blind and placebo standards as his' - also showed favorable results for the drug.

Ivermectin is incredibly cheap due to its widespread use across the world to treat malaria, scabies, lice and other parasitic infections. In Bangladesh, the cost of ivermectin is around $0.60 to $1.80 for a five-day course, according to the report. In Israel, it costs up to $10 per day.

While Schwartz's study showed efficacy among those who had already tested positive, it didn't determine whether ivermectin is an effective prophylactic which could prevent one from contracting Covid-19, nor does it show whether it reduces chances of hospitalization - however Schwartz noted that other studies have shown such evidence.

For example, the study published earlier this year in the American Journal of Therapeutics highlighted that “a review by the Front Line COVID-19 Critical Care Alliance summarized findings from 27 studies on the effects of ivermectin for the prevention and treatment of COVID-19 infection, concluding that ivermectin ‘demonstrates a strong signal of therapeutic efficacy’ against COVID-19.”

“Another recent review found that ivermectin reduced deaths by 75%,” the report said. -Jerusalem Post

As the Post notes, Ivermectin has been actively opposed as a Covid treatment by the World Health Organization, the FDA, and pharmaceutical companies.

The “FDA has not approved ivermectin for use in treating or preventing COVID-19 in humans,” it said.

“Ivermectin tablets are approved at very specific doses for some parasitic worms, and there are topical (on the skin) formulations for head lice and skin conditions like rosacea. Ivermectin is not an antiviral (a drug for treating viruses). Taking large doses of this drug is dangerous and can cause serious harm.”

Mere discussion of the drug has resulted in big-tech censoring or deplatforming thought leaders in collaboration with the Biden administration.

Meanwhile, Merck Co. - which manufactured the drug in the 1980s, has come out big against the use of ivermectin to treat Covid-19. In February, the company's website read: "Company scientists continue to carefully examine the findings of all available and emerging studies of Ivermectin for the treatment of COVID-19 for evidence of efficacy and safety. It is important to note that, to date, our analysis has identified no scientific basis for a potential therapeutic effect against COVID-19 from pre-clinical studies; no meaningful evidence for clinical activity or clinical efficacy in patients with COVID-19 disease, and a concerning lack of safety data in the majority of studies."

As the Post points out - Merck has not launched a single study of its own on ivermectin.

"You would think Merck would be happy to hear that ivermectin might be helpful to corona patients and try to study it, but they are most loudly declaring the drug should not be used," said Schwartz.

"A billion people took it. They gave it to them. It’s a real shame."

In closing, the research team writes that "Developing new medications can take years; therefore, identifying existing drugs that can be re-purposed against COVID-19 [and] that already have an established safety profile through decades of use could play a critical role in suppressing or even ending the SARS-CoV-2 pandemic."

"Using re-purposed medications may be especially important because it could take months, possibly years, for much of the world’s population to get vaccinated, particularly among low- to middle-income populations."

Tyler Durden Wed, 08/04/2021 - 18:55

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