This framework will shape our thinking about the evolution of the global economy over the next several months as we look for signposts and signals in the markets, economic growth and the progression of the virus.
Where are we right now in the road map?
Our COVID-19 crisis roadmap lays out the sequencing we expect from economic data, market performance, investor behaviour – and the virus itself. The roadmap is the foundation for our macro research at this time, and explains why we reckon the recent rally is nothing more than a mid-cycle bounce before markets fall to new lows. Different countries are at different stages in the roadmap – the US is at the start of phase 2 and there are signs that China might be at the end of phase 2. But the recent flare-up of cases in Singapore and Japan suggests this crisis is decidedly non-linear: just as one might have expected these countries to be on the recovery path, the resurgence of the virus means they may be back to the start.
As the virus peak is now in the past in the euro area, and some countries are beginning to ease their lockdown measures, we are yet to see the full depths which economic indicators will plunge. And while the ECB has committed to a €1tn expansion of its bond-buying facility, and the Fed to an unlimited expansion of its balance sheet, the price distortions that this activity creates is unlikely to prevent real economic damage e.g. corporate defaults. Besides, only once economic data starts to beat expectations will we be confident that market pricing reflects the expected earnings miss. We will be happy to consider buying stocks in phase 3, but there’s a long time to go before that point.