COVID-19 UPDATE: US cyclicals pause but China did not get the memo. Houston local peak still 17 days ago = phew Array ( [cookie] => 036ab8-6547a6-cf8512-7b95b8-269f28 [current_usage] => 2 [max_usage] => 2 [current_usage_crypto] => 1 [max_usage_crypto] => 1 [lock] => 1 [message] => [error] => [active_member] => 1 [subscriber] => 0 [role] => fsi_macro [visitor_id] => 591084 [reason] => [method] => ) 1
Uncertainty about the path of COVID-19 worsened this week, as US overall cases rose to new highs and US deaths seemed to "step-up" to 800 per day (past 3 days) vs 500 or so a week ago. And the path of COVID-19 in the US has departed from Western Europe and Asia, both other regions seeing cases generally fall. But this is not all entirely negative developments. Many states have taken significant actions, including mandating masks (see discussion below) and thus, this surge is not growing without action. But we also cannot escape our general view that this surge has 3 factors: (i) nationwide protests created 10000X superspreader events; (ii) significant imported cases from Mexico and Latin America, explaining the surge in FL, CA, AZ, TX (or F-CAT) and the Southern state, generally and (iii) lax compliance with PPE, mitigation (etc.).
And on top of that, equity markets do not like "contested/close" elections. So, the tightening of the Presidential race is further fueling market hesitation. So there are just more building blocks for a wall of worry.
As we approach the weekend, there are two elements we are watching closely:
- F-CAT daily case trends, but TX, and Houston, in particular, as Houston is the "nucleus" of the TX surge. Houston, so far, peaked 17D ago.
- US daily deaths. Will the curious divergence continue or will deaths surge in the next week, if so, we should see a spike this weekend.
UK "Eat Out to Help Out"
The UK is proposing a pretty novel stimulus idea. The government is offering to pay 50% of the restaurant tab, to oil the engine to restart. The U.K. Treasury launched the “Eat Out to Help Out” plan pledging a 50% discount of up to £10 per head for every diner at any participating restaurant, café, pub or eligible food service establishment.
https://www.forbes.com/sites/jemimamcevoy/2020/07/08/british-gov-will-pay-50-of-restaurant-pub-bills-to-stimulate-recovery/#5c7bd6c63f4c
This is a pretty good idea (my opinion) and the terms are:
- 50% discount of up to £10 per head for every diner at any participating restaurant, café, pub or eligible food service establishment.
- The discount can be used unlimited times throughout the month of August,
- Valid Monday to Wednesday on “any eat-in meal,” but can’t be used for alcoholic beverages.
This could be pretty effective in the US, at the right moment. One of the hardest hit industries in the US has been restaurants and restaurant employees. This would be an instant mega-stimulus.
STRATEGY: US Cyclicals "pause" but somehow China did not get the memo...
As visibility and confidence in the US pandemic recovery has faltered, so has the "epicenter" trade (Cyclicals). We have written about this pretty every day this week.
- A good proxy for the "epicenter" trade is the S&P High Beta ETF (SPHB)
- This ETF is now pretty oversold, with its 4-hour RSI at 30 (below 30 is oversold)
- The last 5 times RSI <30, we saw some sort of bounce take place
This is the moment where, as Rob Sluymer, our Head of Technical Analysis comments, "cyclicals need to dig in"
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