Hero Watermark M

COVID-19 Impact Across Markets

Highlights from the Global Research team on the implications of COVID-19 for the global economic and markets outlook. Each week, we will feature the key reports published.

Updated: August 19, 2020

This Week’s Top Chart

Select name in legend to toggle on/off

Source: J.P. Morgan, J.P. Morgan Global FX Strategy & Global EM Research

Cross-Asset Views

Flows & Liquidity: Millennials Boosted Bitcoin

Nikolaos Panigirtzoglou

We see a divergence between the behavior of the older cohorts of the U.S. retail investors’ universe, which have been acting as a drag for the equity market by selling equity funds vs. millennials which have been supporting the equity market by buying individual stocks. Further, the older cohorts prefer gold while the younger cohorts prefer bitcoin as for “alternative” currencies and hence both gold and bitcoin ETFs have been experiencing strong inflows over the past five months. This simultaneous flow support has caused a change in the correlation pattern between bitcoin and other asset classes, with a more positive correlation between bitcoin and gold but also between bitcoin and the dollar. Our position proxy based on the open interest changes in CME Bitcoin futures contracts suggest that the bitcoin is currently overbought.

Follow the Robinhood Money: Buying Behavior and Market Impact of Individual Traders

Peng Cheng, CFA

Using the publicly available Robinhood user holdings data, J.P. Morgan’s QDS research investigates the kind of stocks that retail traders buy and how their actions move the market and finds that Robinhood traders are attracted to stocks that are in the news, experiencing extreme returns and abnormally high trading volumes. In the short term, retail investor interest is a continuation signal. That is, QDS research finds that stocks with increasing popularity with Robinhood users outperform those with decreasing popularity in the next one week and one month. For longer horizons, the evidence is inconclusive. Moreover, we find the individual traders’ market impacts to be stronger on small- and mid-cap stocks than on large-cap stocks. Finally, QDS also documents the market impacts of individual traders on options. Specifically, stocks with increasing popularity experience flattening of short-dated option skew. J.P. Morgan QDS findings are in line with the studies by Barber, Odean and Zhu (2008 and 2009).

The Reopening Continues Despite Second Wave Risk

COVID-19 Update: Lessons From the Battle Against Malaria

MW Kim and Ling Wang

Hong Kong’s third wave and Korea’s second wave appears to have passed the peak with evidence building that repeat waves may be shorter. We argue that policy during secondary waves should be bold, by setting the R0 (secondary infection rate) target close to 1 rather than nearer 0. Lessons from the global malaria eradication effort show that the more successful an eradication program is, the less visible the disease becomes, the greater risk that its funding will be withdrawn and operations will be conducted carelessly. To prevent the resurgence of COVID-19, perhaps we require a sustainable long-term action plan with stable long-term financial commitments, political will and strong operational capacity.

COVID-19 Europe: Spain Deteriorates Further with Another Jump in Cases

Richard Vosser and Ashik Musaddi, CFA

Although we aren’t classifying the reacceleration in daily cases across Europe as a second wave, further local lockdowns seem inevitable. The week of August 3-9 was the fourth bad week in a row for the EU 5, with cases increasing in all countries and by 46% in aggregate to set a new high since the middle of May. The situation is Spain is now clearly more than a spike, with cases rising by 72%, likely taking cases close to 30,000 for the week and could be classified as a second wave with local lockdowns seemingly having little effect on cases so far. France's infection count also grew by 34% to sit close to 11,000 and the Netherlands by 761% to 3,500.

Global Economics and Macro Implications of COVID-19

No End in Sight to Boom in G4 Central Bank Balance Sheets

Michael S Hanson

G4 central bank balance sheets (U.S., U.K., European and Japanese) have expanded nearly $5.7 trillion (16% of G4 GDP) since February and are expected to expand faster through next year than during the global financial crisis. Asset purchases and credit easing policies should increase G4 balance sheets from $21.5 trillion (57% of GDP) now to nearly $27 trillion (67% of GDP) by end-2021. Bank of Japan’s balance sheet is expected to see the largest relative increase, rising nearly 36 percentage points during 2020, taking it from 104% of GDP pre-pandemic to 140% by end-2020. We project each of the other three (Federal Reserve, European Central Bank and Bank of England) to increase their balance sheets by just under 20% this year.

A Strong but Temporary Goods Price Bump

Bruce Kasman

Although COVID-19 represents both negative demand and supply shocks, the fall in demand was the dominant driver of inflation thus far. Both headline and core CPI inflation fell sharply during first half of 2020 with core prices nearly stalling for the first time on record. While energy and services CPI collapsed in the first half, goods prices proved relatively resilient. Goods prices are set to rebound as boomy activity and supply constraints interact. We expect second half goods price inflation to reach its fastest pace in over a decade and add 1.6 percentage points to global inflation over the coming six months.

Global Recovery to Get Boost From Motor Vehicles

Joseph Lupton

Global auto sales have lagged the consumer recovery with June auto sales 20% below pre-pandemic pace. Income supports and elevated saving rates should promote an auto sales boom—translating to a boom in manufacturing. With both auto sales and production still nearly 20% below their pre-pandemic levels, the likelihood of a mere bounce back should add to growth in global industrial production over the coming months. The U.S., Euro area, Japan, Korea, Mexico, Brazil, Canada and parts of Central Eastern Europe stand to benefit the most from rising auto sales.

U.S.: Don't Look Back in Anger at Q2 GDP

Michael Feroli

GDP contracted at a record pace in the second quarter (Q2), with real output contracting 32.9% annualized, but within the quarter strengthened after bottoming in April. While the virus is still in control of the economy, Q2 showed the importance of fiscal policy for Q3 and Q4. While the handoff from Q2 to Q3 looks set to deliver large GDP growth numbers, the handoff from Q3 to Q4 is less assured and more dependent on fiscal policy. Consumption troughed before other components of GDP and rebounded more briskly. The resurgence in virus cases will weigh on sequential gains in consumer spending over the summer.

Market Implications of COVID-19

Global Factor Performance Summary: July 2020

Dubravko Lakos-Bujas

While timing value inflection points within a secular growth/low volatility trend is difficult, we see an increasingly compelling case for value with a greater degree of sustainability than in prior months, especially for higher quality COVID-19 recovery candidates. Style performance dichotomy between value and momentum/growth, already extreme, became even more extreme in July. Aggressive policy easing triggered by the pandemic has accelerated a structural trend of secular growth stocks capturing an even larger market share. momentum (long/short) outperformed uniformly across all regions in July and is up 27% over the last 12-months and value, by contrast, is down -25%. A key structural risk stems from fears of a permanent change in consumer behavior, which we think is overblown. There is also a short-term COVID-19 headline risk as the U.S. goes into election season in a time when pandemic management has become highly politicized.

Bond Universe Growing vs. End of ETF Buying

Eric Beinstein and Nathaniel Rosenbaum

The Federal Reserve (Fed) released Secondary Market Corporate Credit Facility (SMCCF) transaction data for the month of July disclosing the 749 bond trades executed totaling $1.85 billion as well as the 217 ETF trades totaling $521 million giving us full transparency on virtually all of the Corporate Credit Facilities (CCF) holdings. Despite the gradual rotation from bonds to ETFs since June 16, the Fed’s portfolio is still 70% weighted to ETFs, a deviation from the original setup of the facilities. We suspect the market will now entertain the possibility that the Fed may seek to transition these ETF holdings into bonds over time since ETFs don’t mature on their own. The Fed Primary Market Corporate Credit Facility (PMCCF) has yet to fund a single deal despite the Fed’s efforts to publicize the facility, and they may eventually reallocate some of the $500 billion of PMCCF capital to SMCCF ($250 billion of capital), but this is not a near-term scenario given SMCCF has spent 5% of its $250 billion of capital. In our view, given the potency of the CCFs so far, investors need to begin assessing the possible CCF ramifications of the November elections.

Politics by Numbers: Quantifying Populism: India > China

James R. Sullivan, CFA, Rajiv Batra, Anurag Rajat, CFA

India’s pandemic “lost growth” of almost 10 percentage points (on a 24 January baseline) compares to China at only 70 basis points (bps), while income share to the middle- and lower-income tiers in India is trending far weaker than in China. Although the rise of China has received far more academic and press interest relative to India, the analysis by our Asia equity research team to quantify populism finds that conditions in India hold potential for a significant increase in populist rhetoric and policies in India. This, in turn, raises the risk of underperformance by Indian cyclicals, inclusive of financials, materials and energy.

Lebanon: Crises Don’t Age Well

Mikael Eskenazi and Giyas M Gokkent

Lebanon’s economy is in free fall and broad structural reforms, including but not limited to sovereign debt restructuring, are urgently required while its government has just resigned. Lebanon’s debt restructuring may result in more severe reductions in principal and coupons compared to Argentina and Ecuador given the direr economic situation and more limited bargaining power for foreign bondholders. We believe the April Financial Recovery Plan is consistent with a 70% haircut on Eurobonds, but there could be downside risks. We see little upside for bondholders under the current plan with implied recovery between 14-23 under a 70% principal haircut, 50% coupon reduction and 5-year extension restructuring, assuming a 10% exit yield, but implementation is uncertain now that the government has resigned.

Sector Level Views

EMEA Mining & Metals

Dominic O'Kane

Iron ore has held greater than $100 per ton despite fears of an export surge dampening prices. Pricing strength has been underpinned by China steel production surprising on the upside, with WSA data showing year-to-date output +1% vs RoW -14%. This highlights both the limited impact of COVID-19 and accommodative fiscal / monetary policy which has meant China was the only major economy that did not contract in Q2. Steel mill utilization remains greater than 90% vs 12 month average of 85%, steel inventories have normalized & improving mill margins (albeit from low levels) are all positive tailwinds heading into the second half. Furthermore, the People’s Bank of China (PBOC) indicates credit easing will continue which is likely positive for demand given steel-intensive construction & infrastructure are the favored stimulative channels.

Japan Equity Strategy: Popular Stocks Could Lose Favor Near Term

Ryota Sakagami

Quality and growth stocks remained in favor with investors even as the overall market has transitioned from a COVID-19 selloff to recovery and more recently range-bound trading. As a result, growth stocks have sharply outperformed value names and we think this, along with central banks’ large-scale easing, has them set for a slowdown. The most popular stocks held by large numbers of institutional investors have also been concentrated in quality/growth categories and have far outperformed the least popular names. We think all of this has risk-reward for the most popular quality/growth names primed to worsen over at least the next three months and believe caution is warranted.

Back to top

This material is not a product of the Research Departments of J.P. Morgan and is not a research report. Unless otherwise specifically stated, any views or opinions expressed herein are solely those of the authors listed, and may differ from the views and opinions expressed by J.P. Morgan’s Research Departments or other departments or divisions of J.P. Morgan and its affiliates.

RESTRICTED DISTRIBUTION: Distribution of these materials is permitted to investment banking clients of J.P. Morgan.

Distribution of these materials to others is not permitted unless specifically approved by J.P. Morgan. These materials are for your personal use only. Any distribution, copy, reprints and/or forward to others is strictly prohibited. Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. Information herein constitutes our judgment as of the date of this material and is subject to change without notice. Actual events or conditions are unlikely to be consistent with, and may differ materially from, those assumed. Accordingly, actual results will vary and the variations may be material.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In no event shall J.P. Morgan be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction. J.P. Morgan makes no representations as to the legal, tax or accounting consequences of a transaction. The recipient should consult their own legal, regulatory, investment, tax, accounting and other professional advisers as deemed necessary in connection with any purchase of a financial product. This material is for the general information of our clients and is a “solicitation” only as that term is used within CFTC Rule 1.71 and 23.605 promulgated under the U.S. Commodity Exchange Act. Questions regarding swap transactions or swap trading strategies should be directed to one of the Associated Persons of J.P. Morgan’s Swap Dealers.

JPMorgan Chase and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

J.P. Morgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities LLC, J.P. Morgan Limited, J.P. Morgan Securities plc and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in EMEA and Asia-Pacific. Lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. J.P. Morgan deal team members may be employees of any of the foregoing entities.

Copyright 2018 JPMorgan Chase & Co. All rights reserved.