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Market Brief - May 25, 2020

Erica Stephenson - May 23, 2020
Crude oil prices were lower after strong recent gains as the summer driving season begins. Upbeat vaccine developments kicked off US markets soaring up near 4%.
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It was a short week for Canadians coming off the first unofficial long weekend of summer and markets were quieter today with Americans taking off early to enjoy their Memorial Day long weekend. Crude oil prices were lower this morning after strong recent gains as the official start to summer driving season begins. On Monday, upbeat vaccine developments kicked off the US markets soaring up almost 4%. Moderna Inc. said its vaccine candidate produced protective antibodies in all eight healthy people who took part in a 45-person trial that began in March. The vaccine was generally safe and well-tolerated. Dr Fauci even looked at the data and said it was promising and reiterated expectations that a vaccine could start to be deployed late this year.

Corporate updates continue to be well received with a focus on an improvement in demand trends throughout April and into May. Most consumer-facing businesses suggested that post-reopening trends have been ahead of internal expectations. The ability of online platforms to partially offset revenue declines at physical locations was also a widely discussed bright spot. Closer to home, Canadian women’s clothing retailer Reitmans, filed for creditor protection and will look to restructure 576 stores across all its business units. Markets mainly shrugged off this news.

The Globe and Mail reported that Bank of Canada’s Stephen Poloz believes Canada’s economy remains on track for a healthy recovery this year from the COVID-19 crisis, saying that “on balance, the flow of pessimism that I’m hearing is a little too dire”. Poloz suggested that when the health crisis lifts, he expects to see a quick return to normal production though it could take a year to get back to prior levels. Poloz is set to complete his seven-year term on June 2nd.

The rising tension between US and Chinese governments is starting to create a battle ground, while no action on trade has been taken, it has expanded in three main ways. To start, President Trump has threatened to cancel World Health Organization (WHO) funding unless the Organization agrees to “substantive improvements within the next 30 days”. This is a veritable threat since the US funds or delivers $893 million or 15% of the WHO’s total budget. In a 4-page letter to the WHO, President Trump overtly said that the WHO has become too China-centric and was complicit in covering up the spread of coronavirus. China’s retort was to promise $2 billion in coronavirus aid and to share any Chinese developed vaccines with the rest of the world.

America took an even more direct line to China this week. In a unanimous decision, the Senate passed the Holding Foreign Companies Accountable Act. This requires companies to provide evidence that they are not implicitly state-owned, and it prohibits them from being listed on an exchange in the US if they refuse inspection of their records for three consecutive years. While it applies to all countries, several congressional leaders are on the record saying that it is specifically targeted at China. As context, there are currently 233 Chinese ADRs listed in the US representing an aggregate market cap of $1.03 trillion dollars. They represent 3.3% of US market capitalization.

With China grabbing most of the attention this week, it confirmed it will impose new national security laws on Hong Kong that are expected to lead to another wave of mass protests and further tension with the US. Hong Kong markets closed 5.56% lower on news that Beijing is trying to implement new national security measures which could threaten the “One Country, Two Systems” policy which has been in place since Hong Kong’s 1997 handoff from the UK.

Also, after years of shooting for 7%ish GDP growth, China has dropped their target amid the impact and uncertainty globally of the coronavirus. China is targeting a 3.6% fiscal deficit for 2020, up from 2.8% and there is concern about the lack of powerful stimulus in their economy. They are apparently committed to Phase One of the trade deal with the US, but it will be interesting to see how committed the Americans now are.

Tensions between the two nations are unlikely to deescalate much in coming months. It's an election year and if there is one thing President Trump understands, it is his base. A poll released by Morning Consult shows 48% of those surveyed believe China is to blame for the current state of the pandemic compared with 38% who say the U.S. is responsible.

As we continue to monitor the markets and the global economy, we believe staying the course with your investment plan is a recommended course of action.