Markets were relatively flat over the past week, ending on a sour note after renewed geopolitical tension fueled by a tit for tat closing of consulates in China and the U.S. This diverted investor attention away from two important developments. On the coronavirus front, the increase in new case volumes in the U.S. finally showed early signs of slowing, after weeks of rapid growth. Disappointedly, U.S. policy makers have yet to come to an agreement on another round of stimulus which the economy sorely needs. Instead, it was Canada and Europe that have moved forward. Most noteworthy was the latter, where a significant aid package was agreed upon that may mark a historic turning point for the region.
In the U.S the average number of new daily cases remains elevated, at well more than 60,000. But, the trends over the past week in states such as Florida, Texas, and Arizona suggest cases may have peaked, and may be headed lower in the weeks to come. Overall, the slowing of the rate of new infections in the country comes after many states scaled back their reopening plans, added new restrictions, and took preventative measures. This week presented some of the first signs that these actions may be starting to have a positive effect.
Europe deserved some praise this week as the region announced a “Recovery Fund” amounting to more than $1 trillion. There are two noteworthy features. First, the plan allows the European Union to effectively raise capital as if it were one country, via the bond markets, for the very first time (instead of each country tasked with raising capital by themselves). Secondly, the plan will allow for any funds to be distributed across the region. One major implication is that countries that are regarded as being less prosperous, who are predominantly in the south and eastern parts of the region, may be able to raise money more easily and at lower costs. Ultimately, this may foster more sustainable growth potential in the region over time. This is a historic development because finding a compromise on most issues across the 28-member union has proved to be very challenging in recent years. This arrangement has the potential to change the political narrative in the region for the better.
The U.S. on the other hand has yet to reach an agreement on another round of stimulus. Much of the aid that was announced when the pandemic first emerged is set to expire at the end of this month. This includes a supplemental weekly unemployment benefit that has likely limited the hit to many consumers. Extension of some aid programs for the unemployed and businesses, and new legislation for municipal and state governments are needed. The government may have to resort to some temporary extensions to buy more time for negotiations.
On this side of the border, the Canadian government has already done its part. Earlier this month, it extended the Canada Emergency Response Benefit (CERB), which includes unemployment benefits, by two months. And most recently, the government passed legislation to change the Canada Emergency Wage Subsidy (CEWS) program, which was initially designed months ago to provide wage subsidies to businesses. The program will now extend until the end of the year. But more importantly, it has been modified given feedback and underwhelming take-up. It is now characterized by increased business eligibility and promises to provide subsidies based on the scale of revenue declines businesses have experienced.
At some point, governments will have to wean their economies off of the record amounts of aid provided this year. But, that moment is not now. Instead, it remains important for governments to buy time until there is greater stability with respect to the global pandemic and a solid footing from which to recover. We, along with everybody, hope that time is not too far in the future.
As we head into a pivotal period of the current earnings season, tech stocks have buoyed key Wall Street indices – Nasdaq, for one, briefly hit another record high earlier this week. But what’s on the ticker doesn’t necessarily reflect what’s on the horizon. The COVID crisis in the U.S. is worsening, while Congress and the White House square off over another aid package. Even c-suite executives are openly sharing their concerns on the economic recovery. How might the rest of earnings season play out? And what do the latest rallies reveal about consumer sentiment? In the latest “10-Minute Take” podcast, Lori Calvasina, RBC Capital Markets’ Head of U.S. Equity Strategy, shares what’s beneath the latest market movements.
This week’s tip is an update from a previous week. With the province in the midst of phase 3 of reopening it is important to know what areas are moving forward, as well as what phase 3 means to you. The best place to get this information is from the governments Reopening Ontario webpage, which outlines all the need-to-know information around the reopening.
Have a good weekend and enjoy the warm weather!