Second Wave of COVID-19 Slowing Global Recovery… The US is Next
Back on June 30th, I posted an article here about using alternative data to predict future outbreaks of COVID-19, suggesting that Google searches for “loss of smell” or “anosmia” predate a spike in cases by a few weeks.
While at the time Europe was faring relatively well at beating back coronavirus outbreaks compared to the US, I did notice an uptick in those smell-related searches in a few particular regions of Spain.
That trend prompted me to write that “we should see the beginnings of a new outbreak from Madrid through the provinces of La Rioja and Basque Country over the next 2-4 weeks,” which worked out to somewhere between July 15th to August 1st.
Turns out, that prediction was as spot-on as any I have ever made.
Source: Bloomberg, Johns Hopkins
Cases began to ramp up in Spain just a couple of weeks later, and over the last 2 months they have grown to a level larger than the initial March outbreak that shut down their economy. Though the Spanish socialist-led government has called for another lockdown in all of Madrid, the conservative regional government of Madrid has refused, instead opting for targeted regional measures that clearly haven’t helped.
Moreover, we know that any outbreak that happens in one region has the ability to spread to other nearby regions, just as it did at the outset of the summer vacation season here in the US.
As such, it’s not that surprising to see that neighboring European countries – particularly France and the United Kingdom – are showing similar struggles with second waves.
Source: Seawolf Research, Johns Hopkins
The acceleration we see in both Spain and France in late August appeared to coincide with the increase in illegal parties thrown by European youngsters. And worse, these youngsters have already headed back to school – yet another subject I have focused on recently – taking any latent infections along for the ride.
So although we did see business in Europe rebound fairly well during the summer, it has begun to hit serious headwinds with the warm weather largely behind them, causing consumer confidence to flatten out.
Source: Bloomberg
As such, I wanted to look through European economic data today just to get a feel for what has been happening on the ground.
Because judging from the recent inflection point in US cases, Europe’s recent past is likely the US’ near future.
Source: Seawolf Research
COVID Slowing More Than Just European Sentiment
Google search data isn’t just predictive of future coronavirus outbreaks. With the bulk of the world still working from internet-connected homes, it is actually giving us a solid glance into human economic behavior at the macro level.
And when we aggregate that at the sector level – as Arbor Data Science has done here in the chart below – we can see that European search activity has rolled over for just about everything over the past 8 weeks.
Source: Arbor Data Science
Of all those categories, however, the consumer sector is by far the most important, as that drives roughly 70-80% of both European and US gross domestic product (GDP).
Source: Market Realist, Eurostat
Source: Market Realist, Bureau of Economic Analysis
And we can see when we look at retail foot traffic data that despite a solid recovery in May and June, consumer activity in France and the United Kingdom have both begun to head lower in recent weeks, while in Germany – the EU’s strongest economy – it has flattened.
Source: Shoppertrak, Bloomberg
I expect that trend will remain intact not only due to increases in COVID caseloads, but also due to the normal seasonal decline in spending we see from August until holiday shopping begins in early December.
In addition, we are already starting to see a roll-off in restaurant reservations, which had heretofore showed strong pent-up demand – even in comparatively COVID-safe jurisdictions such as Ireland.
Source: OpenTable, Bloomberg
While COVID is likely causing some of that rollover in the UK, there are other factors at work as well. For instance, the combination of a seasonal decline and an overall decline in travel is likely the bigger culprit for Ireland.
Source: Cirium Core
And just to give you an idea of how much travel has been affected globally, this map from the United Nations World Tourism Organization speaks volumes on how tourism has shifted since the beginning of the year.
Source: UNWTO, Statista
Those figures are unlikely to get much better in 2020, either, as just this morning, the International Air Transport Association (IATA) lowered their 2020 year-on-year forecast for air passenger traffic from an already-terrible -63% to -66%.
And because of that, it is exceedingly difficult to see consumer spending – and therefore the European economy – posting a meaningful recovery from its absolute cratering in 2Q. While it will improve to some degree for sure, just how much remains to be seen, and recent increases in COVID-19 cases do not help the region’s prospects.
Source: Bloomberg
Implications for the US
Much like our European counterparts, the US has also moved out of vacation season and sent our kids back to school, only to see the beginnings of regionally focused upticks in new COVID-19 cases.
This second wave is likely to play out very similarly to the one in March from the standpoint of spread, in the sense that whichever regions are spending more time indoors are going to see more cases first.
From a temperature standpoint, that obviously implies we should see colder climates in the north begin to spike as cool fall weather sets in. And indeed, that is proving to be the case, as the most serious current outbreaks are situated in Wisconsin and neighboring states, and New York just reported a large uptick in new cases.
Source: State and Local Health Agencies, NYT
The bulk of these appear to be linked more to children, young adults and college students heading back to school, as the increases clearly began in mid-September.
Source: Bloomberg, Johns Hopkins
But colleges in the south also reported some fairly large outbreaks as well, and with some states now opening bars and restaurants to full capacity, I expect that we will see significant increases in these regions as well… particularly if those bars and restaurants look like this.
Source: State and Local Health Agencies, NYT
Moreover, per Evercore ISI, net new COVID hospitalizations (admissions minus discharges) has turned positive for the first time since July.
Source: Evercore ISI
And when you factor in the realization that the US isn’t even starting off from as strong a point as Europe – hours worked remains flat because unemployment remains sticky – it’s hard to see how consumer spending will meaningfully recover here, either.
Source: Evercore ISI
And we can see exactly why hours worked are starting to roll over when we look at Google Mobility Data for the US, as it exhibits the exact same pattern. Moreover, this lack of consumer activity is also clearly predictive of gasoline consumption by about 1-2 weeks.
Source: Google, Seawolf Research
So, putting all of that together, we know that new COVID cases are beginning to get worse, and that leads to less consumer spending. That then cycles through to less consumption and more unemployment, which in turn completes the deflationary cycle and leads back to even less consumer spending.
Moreover, that is true whether or not economies impart significant restrictions. Sweden, for instance, did not lock down its economy during the March outbreak in Europe, yet retail sales in the country still declined significantly for two consecutive months and have recently slowed again.
Source: Trading Economics
And with tonight’s Presidential Debate reminding us all that a contentious election lies around the corner, it’s just hard to get incredibly excited about the market’s prospects for the next few weeks.
I’m not the only one either, as the non-commercial sector started piling on shorts of Nasdaq 100 futures to a record high starting at the beginning of the month.
Source: Bloomberg
And given where the Invesco QQQ (NasdaqGS: QQQ) currently sits – barely hanging on to its 50-day moving average after nearly two weeks below – either we are going to see a significant push lower fairly soon…
… or we’re going to see the biggest short squeeze this market has ever seen followed by another ridiculous melt-up.
Source: Bloomberg
I’ll be frank – I am honestly not sure which way it will break. But if it busts through that 50-day moving average with momentum – which I do think it will do by the end of the year – we’ll be sure and jump into ProShares UltraPro Short QQQ (NasdaqGS: SQQQ).
In the meantime, we own plenty of hedges in the forms of ProShares Ultra Gold (NYSEArca: UGL) and ProShares Ultra Silver (NYSEArca: AGQ) as well as a long position on the VIX and bearish positions in emerging markets and energy that are going to absolutely rip on any global market downturn.
And with Turkey being forced to introduce a surprise interest rate hike last week, that move could come sooner rather than later.
The rally in agricultural commodities appears to have slowed, however, and we should capture modest gains in both the Teucrium Corn Fund (NYSEArca: CORN) and the Teucrium Soybean Fund (NYSEArca: SOYB), as well as on our position in Invesco DB US Dollar Bullish Fund (NYSEArca:UUP).
Because in whatever direction this market finally moves, having some dry powder at the ready will be essential.
Buckle up.
All the best,