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Corona Capital

16 June 2020 By Breakingviews columnists

Corona Capital is a daily column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.


– Future shocks

– Contrary investors

The next crisis. The world is only slowly, painfully and erratically emerging from the havoc wrought by Covid-19. But Deutsche Bank is already thinking ahead to future catastrophes. Its UK analysts on Tuesday unveiled their take on the likelihood of the world soon having to deal with an even worse pandemic, a huge volcanic eruption on a scale not seen since 1815, a severe solar storm, a global war or a nuclear accident.

The good news is that most have a 1% or less chance of occurring in any given year, though that rises to 2% for a flu pandemic that kills 2.2 million people. Over the course of a decade, though, there’s a 33% probability of one of them hitting, rising to 56% over a 20-year period. At least Deutsche can say we were warned. (By Antony Currie)

Scarily contrary. It’s not just the economy and financial markets that seem disconnected from each other. Investors appear disconnected from the strength of the stimulus-fuelled rally, too. Sure, the proportion of those still fearing a prolonged recession has more than halved since April to 46%, according to Bank of America’s latest fund-manager survey. And almost two-fifths of those who responded reckon we’re in a bull market, up from a quarter in May.

But the largest number of surveyed investors since 1998 reckon the stock market is “overvalued”. And some 64% expect a U-shaped or a W-shaped economic recovery. It’s an acknowledgment, perhaps, that fiscal and monetary aid cannot prevent second waves of Covid-19 or persuade people to go on holiday. Or it could be a recognition that tech stocks, at least in U.S. markets, are driving the rally. But if the market is tying investors up in knots, an unpleasant untangling is likely. (By Dasha Afanasieva)

School winners. Marcus Rashford has arguably just become the most expensive soccer player in English history. The Manchester United forward on Tuesday forced Prime Minister Boris Johnson into a humbling reversal over providing food vouchers for schoolchildren during the summer holiday. The government said it would provide a 120 million pound fund to ensure that eligible children can keep claiming free meals when schools are closed. The U-turn came a day after the 22-year-old launched a campaign urging ministers to change course.

Rashford’s deftly executed lobbying is a welcome relief for English soccer, which has spent the lockdown arguing about how much to cut players’ wages, and whether clubs should apply for state support. The Premier League has returned 170 million pounds to broadcaster Sky to compensate it for the lack of live matches, the Financial Times reported. That puts the cost of ensuring schoolchildren don’t go hungry this summer into stark context. (By Peter Thal Larsen)

Rorschach test. May’s record-breaking 18% increase in U.S. retail sales is more a test of psychology than of the U.S. economy. A pessimist would read the numbers, published on Tuesday, as just math. Sales fell a whopping 15% in April and were bound to increase once the economy started reopening. But an optimist would regard this and other positive data points, like last month’s surprise job gains, as indications the economy is mending faster than many expected.

Who’s right? Probably both. The recent spike in coronavirus cases in states like Texas could mean this burst of activity doesn’t last. And the looming expiration of enhanced unemployment benefits may crimp spending. But much of the country is likely to reopen. And the Trump administration is considering a roughly $1 trillion infrastructure plan, which could boost hiring. Best to be a skeptical optimist: look for green shoots without forgetting to watch out for thorns. (By Anna Szymanski)

Risky business. The credit crunch for indebted companies in Europe is far from over, despite the European Central Bank and governments across the bloc unleashing trillions of euros of stimulus. Fitch Ratings now reckons that some 29% of European issuers of leveraged loans and high-yield bonds that it rates are still “at risk”, a category that includes companies carrying grades of B-minus with a negative outlook, and below. In February, before the coronavirus crisis struck, the rate was just 13%.

That means companies will still have to restructure their debts. Fitch reckons the default rate will hit 4%-5% for junk-rated bonds and 4% for loans in the second half of the year, and rise again to around 8% in 2021. The good news: the proportion of “at-risk” credits is still lower than in 2009, when it peaked at nearly 40%. (By Neil Unmack)

Under the surface. There’s more pain ahead. The UK jobless rate was unchanged at 3.9% in the three months to April, official data showed on Tuesday. The details paint a grimmer picture. The number of people on companies’ payrolls declined, there was a record drop in weekly hours worked, and the quarterly drop in vacancies was the biggest since the series began. Layoffs will rise when the furlough scheme, which is scheduled to run until the end of October, winds up, or even before then. Travis Perkins, Britain’s biggest building materials group, said on Monday that it planned to cut around 2,500 jobs, or 9% of its workforce.

The outlook for the labour market depends on how quickly the economy recovers. Shops selling non-essential goods reopened in England on Monday. But households’ enthusiasm to spend may be reined in by growing job insecurity. And total pay fell 0.4% after adjusting for inflation in the three months to April, from a year ago. That spells trouble. (By Swaha Pattanaik)

Long way around. Jaguar Land Rover’s owner Tata Motors is lurching. The $4.3 billion Indian carmaker stripped out the impact from Covid-19 to show its pre-pandemic turnaround progress. The foreign marques, for example, would have logged an operating margin of 2.4% and positive operating cash flow in the full year to March 2020, instead of coming in negative for both.

The optimistic tone in Monday’s results was buoyed by things getting back to normal and retailers reopening in China. The company may have spoken too soon, however. As Beijing grapples with new virus cases and moves to reimpose restrictions, bad timing may get the better of the carmaker again. Its Mumbai-listed shares declined as much as 4% on Tuesday, twice as much as the benchmark index. (By Una Galani)

No time to die. Shares in Cineworld are up 5% after the cinema chain announced plans to reopen all its theatres by July. Chief Executive Mooky Greidinger is introducing measures such as queue management and socially distant booking to confine the drama and risk of death to the screen as much as possible. But on Tuesday he made no mention of how film lovers will once again enjoy food and drink safely. Given this made up almost 30% of revenue in 2019, that’s important to address.

Several big-budget films, such as “Mulan” and the new James Bond movie “No Time to Die”, are set for release in the coming months. Many of these are opening after having been delayed, so there will be lots of choice. The danger is, with residual nervousness about being exposed to the disease, supply is likely to far outstrip demand. (By Dasha Afanasieva)

Big dig. Europe’s major stock indexes rose 2% after the Federal Reserve said on Monday that it would buy corporate bonds, but the highest climbers were in the building sector. Construction equipment rental group Ashtead, which focuses mainly on the United States, saw its shares jump 17% at one point.

That was partly because it held its dividend, but also because of the potential for a state leg-up. U.S. President Donald Trump has a plan to spend $1 trillion on repairing the country’s creaking infrastructure. If that pans out, construction companies would get some belated cheer. (By Aimee Donnellan)


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