- Stock market corrects lower as worries grow about slow recovery and possible second pandemic wave
- UK today is expected to formally rule out a Brexit extension while beginning a 5-week negotiating marathon
- U.S. consumer sentiment expected to rebound a bit higher
Stock market corrects lower as worries grow about slow recovery and possible second pandemic wave — The S&P 500 index (SPX) on Thursday fell sharply by -5.89% and posted a 2-week low. SPX posted a 3-1/2 month high as recently as Monday, but on Thursday’s low it fell by a total of -7.2%% from that high. SPX on Thursday’s low retraced 22% of the sharp March-June rally.
Thursday’s sharp sell-off was driven by heavy long liquidation pressure sparked in part by Fed Chair Powell’s warning on Wednesday that it will be a “long, hard slog” for the U.S. economy’s recovery and that the pandemic could inflict long-lasting economic damage. The stock market was also discouraged by the FOMC’s median forecast that U.S. GDP will fall by -6.5% in 2020, which was worse than the current consensus for a -5.7% drop. However, the FOMC is forecasting a +5.0% rebound in 2021, which is better than the consensus of +4.0%.
The stock market also fell sharply on Thursday on the pile-up of news reports about rising covid-19 infections in certain areas and whether the U.S. is starting to see a second pandemic wave now that lockdowns are easing. For example, Texas on Wednesday reported 2,504 new coronavirus cases, the largest one-day total since the outbreak began. Florida reported 8,553 new cases a month into its reopening, the most of any seven-day period. California coronavirus hospitalizations have risen in 9 of the last 10 days and are at their highest in a month.
Houston officials on Thursday said that the city is on the “precipice of disaster” and that they are getting close to reimposing a stay-at-home order. The markets on Thursday had to confront the thought that some major cities or states might have to go back on lockdown, thus delaying an economic rebound.
Treasury Secretary Mnuchin on Thursday argued that “We can’t shut down the economy again.” However, that decision is made at the state, county, and city level, and the federal government has no real control over shutdowns.
There are now more than 2 million Americans who have had the Covid-19 disease. That is enough people to fill up 22 stadiums the size of the Rose Bowl in Pasadena, which has a capacity of about 91,000, as noted by The Daily Beast. Meanwhile, 113,700 people are confirmed dead from Covid-19, according to Johns Hopkins, which is almost twice the number of American soldiers (57,939) that were killed in the Vietnam War.
U.S. businesses have adapted as best as they can to pandemic conditions, and the U.S. economy will continue to muddle along. However, it will take an effective vaccine and/or cure before the U.S. economy can fully regain its strength. There is much hope for an effective vaccine, but it will take time for human trials and then a massive global vaccine manufacturing and distribution process.
UK today is expected to formally rule out a Brexit extension while beginning a 5-week negotiating marathon — Cabinet Office Minister Michael Gove today is expected to detail the UK’s post-Brexit customs regime and formally rule out an extension of the transition period beyond the end of this year, according to reporting by Bloomberg.
The UK believes that there is no legal basis for an extension of the transition period if the request is not made before the end of June. UK Prime Minister Johnson and his government continues to swear that there will be no extension of the transition past the end of this year, even if the UK has to leave the single-market with no trade deal and with tariffs going to WTO defaults. It remains to be seen whether that position is simply a means to put maximum negotiating pressure on the EU or whether PM Johnson is serious.
On the brighter side, EU and UK officials have agreed to engage in five straight weeks of talks starting next week aimed at resolving their differences and getting a trade agreement. The UK continues to insist on a Canada-style free trade agreement with no EU standards or regulations. The EU continues to insist on fishing rights, a level playing field, and a dispute resolution procedure as it seeks to prevent a “Singapore on Thames” on its doorstep.
Also, UK Prime Minister Boris Johnson will hold a teleconference on Monday with European Commission President Ursula von der Leyen and other top European officials. The goal will be to inject some political momentum into the trade talks, which have so far produced no progress.
Time is growing short for continued grandstanding since a deal needs to be in place by around October to give enough time for ratifications at the national level. The upcoming 5-week negotiating marathon could be the make-or-break factor for whether there will be an EU-UK trade deal by year-end.
U.S. consumer sentiment expected to rebound a bit higher — The market consensus is for today’s preliminary-June University of Michigan U.S. consumer sentiment index to show a +2.7 point increase to 75.0, adding to May’s +0.5 point increase to 72.3. The index in March/April plunged by a total of -29.2 points to April’s 8-1/2 year low of 71.8 before rebounding slightly higher in May.
Today’s consumer sentiment index for early June is expected to rebound a bit higher due to (1) the partial reopening of most states, and (2) recent strength in the stock market that provided some economic confidence. Yet the overall outlook still remains grim with the pandemic yet to be halted and with millions of people out of work.
