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Best of the Web - June '20

Executive Summary

June continued to be dominated by the news from the Covid-19 pandemic, although news stories started to look slightly more optimistic than in the previous months. However, additional reports of a possible second wave soured prospects as well.

How have plans to “return to normal” turned out?

The pandemic continued to be a major force throughout the world, as new cases continued to climb across June as well. Most of this rise was fueled by persistent outbreaks in the developing world. However, the beginning of a resurgence in the US increased case counts dramatically as well.

Cautious optimism with reopenings: Much of the world has now relaxed many of the harsher lockdown restrictions that were earlier in place, with some countries even declaring victory over the virus. However, people in countries that reopen seem to be cautious despite this, with measures of mobility and sales remaining substantially depressed.

Fears of second wave impacts: Countries are also seeing fears of a second wave of Covid-19 starting to materialise. While some countries like South Korea have expressed that they are already fighting a second wave, others like US, China, Australia, and New Zealand have reinstated some restrictions, although on a more surgical level. While such a surgical approach might limit the economic impact, sentiment is still deteriorating.

Even more negative global outlook: The outlook for 2020 and 2021 has become more negative. The initial economic impact of the pandemic seems to be worse than initially expected, while the increasing likelihood of a second wave is weakening convictions of a quick recovery. The IMF, the World Bank, and the OECD all downgraded their forecasts for 2020, and now expects a much slower recovery than previously anticipated.

What further economic risks exist in this environment?

Weak space for policy support: While the economic support in the wake of the lockdowns have been extraordinarily high, especially in the developed world, data is starting to show that it is nowhere near the scale that might be required. Worries are beginning to surface on how even “rich” countries will be able to finance their own responses, especially if a second wave becomes more widespread.

Emerging world fragility: Limited space for response is most visible in the emerging world. Rising debt levels and limited budget space is reducing the ability of the developing world to adequately meet their economic needs, and is raising questions of widespread default as well. While many countries have made calls for debt forgiveness or deferments, it remains to be seen how encompassing this will be.

Geopolitical and social tensions remain: The impacts of the pandemic have also combined to lead into other tensions that threaten both the precarious stability of the outbreak as well as the world’s recovery. Social tensions in the US over racial injustice have added further risk in USA, while military tensions between China and India as well as softer tensions between China and the US have also raised worries.

How have commodities been performing?

Oil prices continued to rise:

Oil prices performed well in June, as countries moving out of lockdowns boosted expectations of demand for crude, while supply cuts continued to expand. Brent crude rose from lows of US$ 34.74 per barrel on the 27th of May to highs of US$ 43.08 per barrel by the 22nd of June, before moderating slightly from those levels.

Gold prices rose to 2012 highs:

Prices of gold recovered in June from their fall early in the month, as worries of a second wave increased demand for haven assets despite some indications of a global loosening. Prices moved from lows of US$ 1683.00 per ounce on the 5th of June to a nearly 9-year high of US$ 1782.00 per ounce by the 23rd of June.


Top 5

Global economy will take $12tn hit from coronavirus, says IMF

The IMF’s latest outlook indicates the global economy may take a USD 12 Tn hit due to the pandemic. It notes that the impact of lockdowns on the global labour market has been catastrophic, but also that the recent rebound in financial markets seems appears to be disconnected from underlying economic prospects

Emerging Markets Investors Are Doubtful the Asset Class Can Keep Rallying

An HSBC survey of EM investors has revealed that they do not anticipate the EM rally will carry on. The average score of the survey indicates investors only have a moderate risk appetite, driven by uncertainty of the global recovery. Investors appear to prefer hard currency assets versus local stocks and bonds.

China’s Slow Recovery Points to Hard Road Back for Global Economy

Analyst opinion remains divided regarding the economic recovery from the pandemic. While some point to the struggling Chinese recovery as being a glimpse of what global recovery may look like, others point to a new expansion cycle in the global economy predicting a sharp but short recession.

For U.S. economy, the bottom may be here, but the rebound is slow so far

US retail foot traffic has steadily grown, with current levels within 20% of 2019 figures as states lift lockdowns. However, with broad activity indices hovering near the bottom and unemployment claims soaring, there is no clear indication of recovery.

Murder, Crisis, Potential Default: Unlikely Winners Emerge in EM

Sri Lanka along with 3 other nations are leading gains in EM sovereign bonds this month. The bonds are attractive to investors as some are trading at higher yields than what would even be warranted in more distressed scenarios.

Compiled by: Chayu Damsinghe

Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned herein may not be suitable to all investors.


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