Week ahead: Bananarama was right after all, but equities don't care

08 April 2020

    Week ahead: Bananarama
     was right after all, but
      equities don’t care
Andreas Steno Larsen | Mikael Sarwe

- Some light at the end of the corona tunnel, but borders will be closed for
long
- US equities are almost on a par with June 2019. Does that make sense?
- Asian economies are re-closing – a clear risk in Europe/US over the summer
as well
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Main Releases

Bananarama was right after all. We are facing a cruel summer and it’s getting increasingly visible (at least
to us) that we will have to live with substantial restrictions in the West at the very least until the middle of
Q3. Big festivals will be cancelled, historic sport events will be postponed; this is not a pleasant exercise. The
current clear-cut tendency to pre-cancel everything with substantial amounts of people gathered comes
despite a flattening of case curves across the Western world. Curfews work, the only thing we don’t know
now is how to get out of them again. So far, we haven’t seen a single feasible exit-plan being presented, and
who is able to tell how to prevent the case curve from re-accelerating once the economies are slowly re-
opened? The answer is currently no one.

Markets have taken the case-curve flattening as a conciliatory signal that the worst is now almost behind
us. March and April will be the worst months of this recession, while we will very slowly but surely rebound

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-
but-equities-dont-care

from here. That is not an entirely unlikely scenario, the question is just how long it takes to return to just barely
normal.

Chart 1: Fatal cases are close to peaking in the United States – a fairly general
phenomenon across the west

In recent days authorities in eg Japan and Singapore have re-tightened the stance on Corona as a new case
spike was seen. Singaporean authorities weren’t fully able to explain why, which means that case growth
likely stems from people entering Singapore from the outside. This is a template of what other economies
could be faced with, also in the West. Case growth may start accelerating swiftly again, if the economies
are not opened very carefully only. And the Singaporean case also reveals that it is unlikely that freedom of
movement will be normalised (to 2019 levels) across borders the next couple of quarters. Borders will be
closed for long.

2020 is one to bury in the midden! Our best guess is that we won’t return to normal until during 2021.

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Chart 2: Singaporean case growth re-spiked due to imported Corona cases

We hence need to be on the watch around countries with a high sensitivity towards tourism. Tourism will not
be allowed to return to normal anytime soon, if we are right on our corona assumptions. An Island-group like
the Seychelles has 70% of GDP coming from tourism, but no one arrived last week. A true disaster for such a
small society.

In larger economies, Thailand, Greece and Portugal all have 20% of their respective GDP coming from tourism
(Italy, Spain, Turkey, South Africa and Mexico are other highly tourism sensitive economies). None of this
income will return anytime soon and these countries will in general be faced with ugly double deficits in the
meanwhile. Is it possible to cope with both a fiscal deficit and worsening current account situations due to no
tourism?

This will test the Euro-area burden sharing again (since the Euro area in total holds a clear current account
surplus), while countries like Thailand, Mexico and Turkey risks being faced with a material weakening
outlook of their currencies due to the widening double deficits. A crisis in tourism-heavy EM countries needs
to be avoided to turn the tide on the strong USD. We have highlighted the big downside risks to the USD,
ONCE we are on the other side of the corona mess (FX weekly: USD needs to weaken or else a Plaza Accord
2.0 is in play). Getting closer to a firmer re-opening strategy is probably a prerequisite for starting the USD
weakening trend.

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Chart 3: Thailand’s current account to fall o a cli due to the sudden stop in tourism

Tourism-heavy countries are of course not the only ones faced with renewed heavy upcoming debt
burdens due to the corona crisis. The average bailout package (we dislike the word stimulus package, since
you cannot stimulate a closed economy) is almost worth 20% of GDP in the five big economies. Japan joined
the club with a 20% of GDP bailout program this week. No wonder the central banks will have to warm
up the printers. From a risk/reward perspective such percentage of GDP numbers may even prove way to
conservative, if we are right that it will take the most of 2020 to return to just barely normal.

Can the market cope with such issuance? If our base case for the SOMA portfolio holds true (Global Macro:
Policy responses if the corona recession deepens), the Fed will have bought more bonds than the US Treasury
is about to issue during 2020 (the red line holds a conservative USD 2.5trn debt increase scenario). If you
buy more than 100B’s a day (as the Fed has done in Treasuries + MBS), then USD 2.5trn is nothing. The only
unknown is if inflation explodes on the other side of the crisis. NY Fed started writing about the 1940s yield-
curve-control this week, which received widespread awareness. Does it matter a whole lot by now? Buying
100bn worth of bonds per day is close to YCC in practice, isn’t it?

The case is not as clear cut in the Euro area, where the ECB will be tested. The politicians could be forced
to discuss coronabonds unless the ECB pockets prove deep enough (Bond Watch: Overflow of bonds meets
the ECB’s deep pockets) , but so far they are not even able to agree on a common communiqué in the
Euro group. It’s either de facto burden sharing or else we are slowly looking at very adverse EUR scenarios.

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Chart 4: Record issuance? No problem, we buy it all. Best regards from the Fed

The cascade of central bank printed liquidity in USDs, EURs and JPYs etc is probably also the best reason to
buy equities and likely also a big part of the reason why equities have been bought in recent weeks. S&P 500
is very close to the levels seen in June 2019. It’s not like it has been a smooth ride since, so do equities really
belong up here despite a worse-than-2008 recession underway?

Essentially you can’t print demand or profit during a politically decided recession and if everyone
believed we were in a late cycle to start with, isn't it a high risk that companies don't re-hire people on the
other side of the Corona-lockdown? When a lot of money is printed versus the overall size of the equity and
debt market, it is usually a bull signal, but not until a while after. Maybe 2021 will be the most ketchupped
market ever, but we likely need to go lower before.

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Chart 5: If money printing accelerates versus bond/debt markets it usually means happy
days after a while

SPX forward P/Es remain elevated around 16.8, which are clearly above equity market bottoms in 2015,
2016 and 2018, when we had no recession and also far from the bottoms seen during the GFC and Eurodebt
crisis periods. Isn’t that a little odd given that the current recession will most likely prove (much) deeper
than the 2008-one? If P/Es eventually drop, it may be a decent sign for gold vs equities – in particular if our
6-12-month call of a weaker USD also materialises (Global: Once we are out of this mess, the USD could be
hammered).

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Chart 6: Forward P/Es are above 2015,2016 and 2018 bottoms, which seems odd given
the current recession

In Scandinavia, lay-os sadly, but naturally, continues as a result of the virus containment eorts and the
global recession. 12,700 workers were given notice in Sweden last week (indicating that unemployment will
rise swiftly in coming months. The spike in redundancy notices gives some sort of translation to personal
consumption expenditures. It currently looks worse than both the 08/09 financial crisis and the 90s crisis in
Sweden. SEK looks oddly strong given this. The big question is whether the Riksbank could be tempted to go
back to negative in this scenario – at least there is a risk still, if the SEK stays relatively strong.

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Chart 7: Redundancy notices hint of historically weak spending figures in Sweden

What is most important in the week ahead?
Writing this editorial in the morning before Maundy Thursday, we remain focused on the oil market ahead
of the discussions between Saudi Arabia and Russia in the OPEC+ meetings. We consider it a decently
conciliatory signal that Aramco postponed publishing the monthly price list until Thursday. It means that the
two parties are at least talking to each other currently. This also leaves us with a slightly more constructive
taste in our mouth surrounding NOK compared to a few weeks back. We doubt whether the US will be
involved in a production cut.

The US rig count will likely drop markedly over the coming 2-3 months, why it “may happen automatically” to
use the words of Donald Trump. Levels around USD 40-45 per barrel is needed for the US shale production
to be just barely profitable, meaning that the OPEC+ group can cut production (a lot) and still annoy the US
shale producers another while.

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Chart 8: The number of rigs in operation will likely drop markedly in the coming months in
the US

Otherwise, the US retail sales figure will likely be the most important one to watch in an otherwise relatively
quiet data week next week. Spend-trend data suggest that we might be in for the weakest ever retail
sales growth. Key figures play a secondary role currently and communication from politicians on whether
economies will be gradually re-opened after Easter as was communicated in both Austria, Norway and
Denmark (Corona daily update) this week may prove more important than any key figures.

China will already publish Q1 GDP figures next week (yes, you heard it right). We expect the GDP growth
to be an unprecedented low of -10% y/y and -14% q/q – an early warning of what we will see across the
western world (if not the globe).

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Chart 9: The weakest ever retail sales report to be delivered in the US?

Recent Research
EM Trac Light March 2020 (7 Apr)

Norway Macro: Three scenarios for the Norwegian economy (6 Apr)

FX weekly: USD needs to weaken or else it is time for a new Plaza accord (5 Apr)

Monday
No major events as most markets are closed due to Easter Monday.

Tuesday
The first business day after Easter brings inflation numbers for Denmark and Finland. Later in the evening,
Fed’s Evans (non-voter, dove) speaks in Pittsburgh.

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Wednesday
On Wednesday, both inflation and SPES unemployment figures are released for Sweden. In the evening,
we can look forward to a cocktail of data from the US, with the NY Fed manufacturing index, retail sales
and industrial production as the most important events. After that, the Bank of Canada announces its rate
decision.

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Thursday
The, for the moment, most anticipated weekly statistic, US initial jobless claims, is released on Thursday. At
the same time, the Philly fed business index is released. In Europe, Swedish inflation expectations and euro
zone industrial production figures are out in the morning.

e-markets.nordea.com/article/56816/week-ahead-bananarama-was-right-after-all-but-equities-dont-care

Friday
Friday is all about China. After the huge slump in industrial production last month, will Chinese figures
rebound? China, which was first out in the corona crisis, also reveals its GDP figures for the first quarter.
Retail sales figures for March will also provide a hunch whether domestic consumption is picking up or not.

Andreas Steno Larsen                Mikael Sarwe
Global FX/FI Strategist             Director, Head of Strategy Sweden
andreas.steno.larsen@nordea.com     mikael.sarwe@nordea.com
+45 55 46 72 29                     +46 8 614 99 09

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