Authored by Ian Lyngen, Benjamin Jeffrey and Jon Hill of BMO Capital
Elbow Bumps and Bandanas
It’s May Day and Trump’s trade war is back. Shifting away from addressing the pandemic, the White House is reportedly designing retaliatory actions against China – picking up where the issue was paused for the outbreak. It’s an election year and the efforts at laying the groundwork for The Donald’s reelection bid are clearly well underway. With only six months to go, the coronavirus has derailed the normal campaigning process and the summer promises to be a sprint unlike any in recent political memory – elbow bumps and bandanas required. At present, the White House’s attempts to block the federal government’s retirement fund from investing is Chinese equities on the basis of national security is the latest political contribution to the risk-off sentiment. It’s difficult to imagine the administration’s efforts stop there as rumblings of an uptick in tariffs are once again making the rounds.
As the political machine appears to be getting back to ‘business as usual’ attention will soon shift toward assessing the post-pandemic economic landscape. This isn’t to suggest the Covid-19 threat has been eliminated, but rather the reopenings scheduled to commence in the coming weeks will serve as the first step in getting back to the new normal. As the consumer emerges from enforced hibernation, eyes adjusting to the sun, enjoying the fresh air filtered through quality N95 protection, and strangers, friends, and acquaintances a respectful social distance away, we cannot help but ponder what will be the first post-lockdown purchases. The sales of necessities (food, health, etc.) haven’t suffered in the same manner as big ticket items and goods deemed delayable – apparel, etc. There is little doubt that pent up demand will become evident for certain purchases, however there are also lost months of spending on services which will never be realized.
The more germane question is how consumption patterns will permanently be altered as a result of the pandemic. There are plenty of dire predictions about how large venues and sporting events will never be the same; perhaps, but that is entirely different from permanently closed. Our take, for whatever it might be worth, is that there will be a period of adjustment accompanied by a modest shift in spending behavior, which eventually resolves into a ‘new’ reality which quickly becomes, well… reality. This transition will not occur overnight and it’s the redefining of the consumption landscape that has created the next meaningful unknown for 2020. As with most unknowns, the uncertainty is more paralyzing than the results themselves.
It’s Friday, and not a day too soon. The recent patterns of risk-on accompanied by higher yields ahead of the weekend appears in jeopardy this morning as global equities are under pressure. The renewed trade tensions along with guidance from Amazon and Apple have weighed on the near-term outlook and the extent to which the shift in sentiment extends will be of particular note as the weekend swiftly approaches. We maintain that with the coronavirus curve flattened and reopenings on the horizon, the balance of headline risks over the weekend have been skewed toward positive/risk-friendly, although there is little question the passage of month-end has altered the tone, at least on the margin.