Since late February, the global outbreak has started its second wave, and although the peak number of new confirmed cases per day is about the same as the last round, the divergence of the outbreak between countries is very obvious, i.e., the last round was a full-scale outbreak and this round is a localized outbreak, in which the daily number of new cases in India exceeds 400,000. For this reason, the theme of this article is whether another overseas outbreak will have a negative impact on this round of economic recovery, whether monetary policy in major economies will postpone the turn, and what is the impact of the Indian outbreak on global stock markets and commodities?

  01

  How to look at the “second outbreak” of overseas epidemic

  Analysts found that as of April 29, India has been more than 300,000 new cases on a single day for 8 consecutive days, accounting for almost half of the world’s cases, thus receiving higher attention. In fact in addition to India, both Germany, France, Spain and Japan in developed economies and Turkey and Argentina in emerging market countries have seen a significant rebound in recent outbreaks. The difference is that the average daily number of new cases in developed economies is significantly lower than the previous highs, while almost all developing countries have hit new highs. Considering that vaccination rates are currently low in all these countries, the difference in national governance levels and healthcare resources may be reflected behind the scenes.

Analysts believe that the recent changes in the epidemic data mainly come from India disturbance. Globally, the 7-day average of new confirmed cases has increased from 360,000 in mid-to-late February to 820,000 now, but 74% of the increment is from India, with India accounting for 340,000 of the 460,000 increment, and India, Turkey and Brazil together contributing 390,000, accounting for 85% of the increment in this period.

  The second wave of the global epidemic, virus mutation may not be the main cause. The main reason for the second wave of the epidemic, mainly in India and Brazil, may be the gathering of people rather than virus mutation. The epidemic situation in Asia, Africa and Latin America rebounded from mid to late March after the situation improved significantly in February, and India did not show a time lead, so the main reason for the rebound was that most countries relaxed their epidemic prevention measures after the epidemic improved in February, and the movement and gathering of people resumed. the rapid deterioration of the epidemic in India since April may be related to the large number of people gathering in India during some traditional festivals.

  In terms of estimated transmission coefficients R0, most countries saw their R0 drop to around or even below 1 by mid to late April (Brazil’s R0 returned to around 0.9), but India’s R0 is still estimated to be around 1.8, a high level based on the published confirmed diagnosis data. The highest R0 in most countries after the first wave of the epidemic (April 2020) has only ever been around 1.5.

  Such a high R0 in India implies that its epidemic mitigation process will be slow because, judging from the effectiveness of prevention and control in most countries, its R0 will only drop to slightly less than 1 even if the subsequent movement of people and aggregation in India come down, implying that the size of the epidemic will only decline slowly. In addition, the lethality rate (number of deaths/number of confirmed cases) announced by India has been steadily decreasing under the severe situation of the epidemic and the crowded medical resources, which indicates that the data announced by India may be more watery.

  Analysts believe that the current round of the Indian epidemic is 1) counter-seasonal, with the current Indian outbreak in New Delhi where the temperature is close to 40 degrees Celsius, and 2) dominated by variant viruses with higher transmission and mortality rates. This means that once the epidemic is spread in developing countries, it will be even more difficult to treat and recover economically than in the same period last year (last year, the spread of the original virus declined after the temperature rose, leaving at least a “window” for “summer recovery”).

  02

  How the outbreak will affect the Indian economy

  The outbreak in India has had essentially no impact on the global economy. First of all, from the perspective of the total Indian economy, the Indian economy will account for only 3.2% of the global economy in 2020, and there is still a downward trend in the past few years.

  Second, from the perspective of India’s external dependence, the external dependence of the Indian economy in 2020 is about 23.9%, and the downward trend is getting faster in the past few years. Although the Indian economy has developed faster in these years, however, from an overall perspective, India’s impact on the world economy is still very small.

  The rapid outbreak of this epidemic in India has had more of an economic impact on the country’s economy, while the impact from the spread of the epidemic across borders, or on the overall global trade repair, is likely to be more limited. Nevertheless, we still need to pay attention to the short-term supply and demand gap allocation opportunities in some industries.

  In terms of the impact of the outbreak on the country, the Indian economy has actually shrunk significantly last year due to the impact of the epidemic. The Indian economy is dominated by the service sector, and the outbreak will further depress the service sector, which has not yet recovered. In this year’s Indian government budget, fiscal expenditure for fiscal year 2021-2022 is Rs. 34.83 trillion, accounting for about 9.5% of GDP, which is significantly more than expected. To cope with the fiscal deficit, the Indian government plans to borrow 12 trillion rupees in FY 2021, higher than the previously budgeted 7.8 trillion rupees and close to a historical record. The re-emergence of the epidemic is undoubtedly adding to India’s already fragile economy.

  From the trade level, although India’s import and export amount accounts for only about 2% of the global proportion, the direct impact on the global trade level may be more limited. But for some specific industries, India still has a strong voice in the supply and demand chain of the global industry.

  First, the biotechnology sector: India’s life sciences industry is the largest and rapidly growing market in the Asia-Pacific region. Specifically, in terms of medical devices and equipment, India’s medical device sector ranks among the top 20 in the world; among the 20 biotechnology companies in India, only four are foreign companies. India is the third largest pharmaceutical country in the world, accounting for 8% of global drug production. In addition, India accounts for more than 45% of global demand for APIs. In terms of biotechnology, the Indian biotechnology sector is the third largest market in the Asia-Pacific region, which means that the continued spread of the epidemic in India is expected to usher in opportunities to repair the resilience of the performance of other global biotechnology, especially API companies.

  Second, the automotive sector: India is the world’s largest consumer of motorcycles, the fourth largest passenger car market, the seventh largest producer of commercial vehicles, currently, the Indian passenger car market is dominated by Japanese manufacturers, including Suzuki’s market share of 51%. This also means that the continued spread of the epidemic in India is likely to drag down the recovery of the performance of the relevant multinational automotive companies this year.

  Third, the field of minerals: minerals / fuel products, precious metals and products are India’s main exports to the global commodities. Among them, in the field of minerals and mica production in the world’s first, especially in the field of high-quality white mica, almost reached the “global monopoly” degree. This means that the continued spread of the epidemic in India is likely to provide a better window of price increases for related resource products.

  Fourth, the field of textiles: India is one of the world’s major sources of cotton, jute, production also ranks among the world’s top. This means that the continued spread of the epidemic will not only affect the actual production of related agricultural products this year and will also make last year’s order transfer phenomenon is expected to persist.

03

  Global economic impact of the Indian epidemic

  As the Indian epidemic is now fully recognized by the market, and the number of new infections of more than 400,000 per day means that its spread to neighboring countries and even to the world is somehow inevitable, the most important thing to focus on is the characteristics of its global spread compared to the Indian epidemic itself.

  For developed countries such as the United States and the United Kingdom, which have achieved better epidemic prevention, the spread of the epidemic in developing countries such as India will not change its current trend of rapid downward movement of the epidemic and full economic recovery, due to the MRI-based vaccines inoculated in the above countries, at least for the time being, for all types of mutated viruses.

  However, global transportation and shipping will inevitably be delayed; in addition, global central banks will be more cautious about the complexity of the epidemic, and the policy of tightening money too quickly is expected to be delayed. At the same time, the slope of the global demand recovery slows but lasts longer, the most beneficial assets are the traditional economic index represented by the Dow Jones, in fact, in the past month, the Dow Jones has replaced commodities as the global asset leader. Considering the advantages of the U.S. epidemic prevention and control relative to other economies, it is expected that the U.S. dollar index will still maintain a moderate appreciation, so it is still bullish on the performance of U.S. stocks during the year.

  In terms of economic volume and trade scale, India’s direct impact on the global economy is limited, but it may bring greater impact to the industrial chain of industries such as spinning and pharmaceuticals. However, India, as one of the world’s largest vaccine production bases, participates in the WHO-led New Crown Vaccine Implementation Program (COVAX), which promises to provide at least 1.1 billion doses of vaccines to other developing countries. As the domestic epidemic worsens, India’s vaccine supply capacity decreases significantly, potentially impacting global vaccine supply and causing even more lag in vaccination progress in developing countries.

  As emerging market countries are lagging behind in both vaccination speed and medical standards, a “secondary outbreak” would mean a further divergence in recovery between emerging and developed economies. The impact is mainly reflected in two aspects: First, some resource countries supply constraints lead to the relevant commodity prices still have upward pressure, the second is the “substitution effect” to continue to support China’s exports to maintain a high boom. In addition, with the United States and other developed countries to take the lead in restoring economic activity to normal, easing policy may be marginal adjustment, many economic structure and financial system is weak in developing economies face greater financial risks, do not rule out the possibility of a crisis.

  Since mid-February, the overseas epidemic has “reared its head” again, but this time the epidemic will not interrupt the trend of global economic recovery. On the one hand, after accumulating more than a year of experience in epidemic prevention and control, the ability of major economies to balance epidemic prevention and control and economic activities has improved significantly, and there are few “one-size-fits-all” blockade measures, which can effectively reduce the impact on the entity; on the other hand, with the speed of vaccination, major economies such as the U.S. and Europe have seen the universal immunization On the other hand, with the speed of vaccination, major economies in the U.S. and Europe have seen the “dawn” of universal immunization, and the momentum of economic repair is relatively strong.

  However, the recent recurrence of the epidemic has also exposed the increasing divergence between developed and emerging economies, so it is difficult to have a global demand resonance in the post-epidemic era, and the economic recovery may be “successive”, i.e., developed economies return to normal first, and developing countries lag behind in repair. This means that the current round of economic recovery has two characteristics: first, the duration may be extended; second, the height of the rebound in fundamentals may be limited.

  The long-term complexity and uncertainty of the epidemic may increase the resistance to economic globalization. Since the last U.S. administration, trade protectionism has clearly risen, pursuing the return of manufacturing industries to their home countries, and the globalization process has been hindered. And the embargo caused by the new crown epidemic has further undermined confidence in economic globalization. As vaccination rates have improved and the epidemic in Europe and the U.S. has significantly improved, the market has high expectations that international movement of people will resume as soon as possible, and this wave of the epidemic in India is a reminder that the complexity and uncertainty of the epidemic may remain for a longer period of time.

04

  Will the resurgence of the epidemic affect the economic policies of major economies

  The current round of global epidemic rebound is mainly caused by emerging market economies. The biggest difference between this round of global epidemic rebound and the last one is that this round of epidemic is mainly caused by the deterioration of the situation in emerging economies, while the overall epidemic in developed economies is more stable. From the perspective of daily new cases, the U.S. share of the global epidemic has dropped to 8% from about 35% at the peak of the last round, with similar performance in major European countries.

  The divergence of global epidemic dynamics may put emerging economies in a policy dilemma. The new epidemic is still the most important factor limiting economic recovery, and the divergence of global epidemic dynamics makes economic recovery prospects also face differences, with growth performance of emerging economies trapped in the epidemic quagmire may significantly lag behind that of developed economies. And in the context of the improvement of the epidemic, the economy to accelerate recovery, developed economies began to discuss the return of monetary policy normalization, such as the Bank of Canada to take the lead in opening the table reduction. This makes emerging market countries face a dilemma. On the one hand, in order to cope with the recovery of developed economies may trigger the upward pressure of inflation and capital outflow, some emerging market countries have opened interest rate hikes; but on the other hand, emerging economies due to the constraints of the epidemic is still in place, the economic growth trend is still weak, early interest rate hikes are not conducive to the recovery of its domestic economy, fiscal balance contradictions will also rise.

  On the question of whether the Fed’s monetary policy will turn, macro policy prognosis do not always focus on high-frequency data, relative to the monthly data changes, policy has a lag characteristics, that is, until several consecutive quarters of data to confirm the recovery before the possibility of turning, not too “unexpected”. Therefore, as judged in last week’s discussion, the second wave of the global epidemic, making the full improvement of the epidemic and delayed, the global economic recovery is weakening, the Fed should not consider turning this year.

05

  Geometric impact of runaway epidemic in India on global stock market

  The direct impact of a worsening epidemic in a few countries such as India on global economic growth is relatively small, but it will delay the time for cross-border movement of people and economic activities to resume. As demand rises in Europe and the US, the supply chain disruptions may push up prices, thus having a greater impact on monetary policy and asset prices. For listed companies, enterprises with a higher share of overseas business or a higher dependence of their supply chains on overseas (such as some processing trade enterprises with both ends) may face elevated uncertainty. And companies that meet the demand for technological upgrading and import substitution (such as mid- to high-end manufacturing) will see better development opportunities.

  The impact of the Indian epidemic on global capital markets will also be minimal. The impact of the Indian epidemic on the global macroeconomic recovery is relatively small, and the economy still shows a rapid post-epidemic rebound phase (perhaps with a slight impact on the slope). Assuming that the Indian economy goes down sharply again after the secondary epidemic and the RBI cuts interest rates to stimulate domestic liquidity and the economy, the operation will also have little impact on the global stock market, and from the previous RBI interest rate cuts, the short-term global market will be up and down (up probability about 2/3, down probability about 1/3). Finally, from the perspective of global market risk appetite, the market’s marginal risk appetite impact for recurring events is diminishing (refer to the US-China friction since 2018).

  According to Wang Shijin, despite the severity of the epidemic, the Indian stock index rose 1.4% in April, which is better than the SSE, and the retracement from the previous high was only about 6%. Brazil and Turkey stock indices were also both up, which may indicate that economic activity and liquidity may have a greater impact on the market relative to new confirmed cases, or that the aggravation of the epidemic means a longer period of monetary easing, such as in Germany and France where confirmed cases were up faster in March, but stock indices were up sharply.

  The changing point for global equity markets could be in June. In terms of vaccination, the vaccination rate has exceeded 40% in the UK and the US, and only about 20% in the EU at the moment, but it is a significant increase of 9% from the end of March, and is expected to reach 70% around July, which could be a changing point for global equities at that time. As mentioned last week, a 75% vaccination rate is a prerequisite for the Fed to discuss gradual QE tapering, and the U.S. vaccination rate is expected to reach 75% by mid-June, so the June FOMC meeting could be a key window when market expectations of liquidity tightening may strengthen.

  May is still a good window to go long. Overall, the current overseas macro situation and policy environment is still favorable to the stock market, and the economic recovery-related financial cycle sector logic is more smooth, the follow-up focus on the Biden base construction and tax plan.

06

  Second wave” of resource country epidemics is on the rise – has the commodity bull market arrived?

  Does the rise of the “second wave” of the epidemic in resource countries mean that the commodities bull market has arrived? After the first wave of global epidemic prevention and control has begun to bear fruit, the short-term supply and demand gap under the intersection of irregular recovery and industrial chain distribution in various economies, i.e., the demand recovery under the recovery of consumer countries and the supply bottleneck in resource countries have not yet been removed from the supply-demand mismatch, combined with the global “low interest rates, strong stimulus “The easing environment in the commodity market speculative positions in the “push”, resulting in 2021 commodities again structural price trend.

  This short-term supply and demand gap will dynamically contract under the scenario assumption that the global epidemic shock subsides. And recently, India, Chile and other countries, the “second wave” of the outbreak of the epidemic, to a certain extent, slowed the dynamic contraction of the supply and demand gap, making the slope of the relevant upstream raw material price increases “steepening”. Some commodity markets will continue the trend of structural price increases in the short term, but it is still difficult to say “commodity bull market” in the medium and long term.

  According to the World Bureau of Metal Statistics (WBMS) data, the scale of India’s mineral exports in 2019 accounted for 15.0% of total exports; Chile, the world’s largest copper producer, produced 5,787,400 tons of copper in 2019, accounting for about 28% of the world. In the short term, the global economy’s dependence on minerals from resource countries, the collapse of the healthcare system and vaccine shortages in countries such as India and Chile will support the short-term relative strength of mineral prices for iron ore, copper and other minerals. However, in the medium to long term, it is still too early to judge the commodity “bull market has arrived”.

  From a historical point of view, commodity bull markets often appear in: global economic growth is still in the upward channel or the global emergence of economies with strong consumption demand for commodities. For example, 1) from January 2002 to June 2008, the global economy was on an upward path, China’s economy took off after joining the WTO, and the rapid industrialization and urbanization greatly increased the demand for upstream resources, triggering a bull market in commodities; 2) from June 2009 to June 2011, after the global financial crisis, China’s “4 trillion (2) From June 2009 to June 2011, after the global financial crisis, China’s real estate and infrastructure construction boom under the “4 trillion stimulus” strongly supported the upstream raw materials, triggering another round of commodity bull market, which ended with a sharp drop in oil prices under OPEC’s significant increase in production.

 Therefore, this round of commodity price increase is still a structural market caused by the short-term supply and demand gap under the impact of the epidemic. In particular, the weakening of the U.S. dollar index caused by the Fed’s accommodative monetary environment has also contributed to the rise in commodity prices to some extent. And along with the recovery of the endogenous dynamics of the U.S. economy, a mild rebound in the dollar index will also form a constraint on the momentum of the surge. With the speculative positions in the commodity market “evaporated”, the observation of the sustainability of the price increase of some resources also need to “wait for the tide to fall”.

  But Xu Chi put forward a slightly different point of view: the global epidemic of staggered recovery, meaning that the market previously worried about the second quarter of the global concentration of recovery, the commodity “super gap” no longer exists, which, as the “mother of inflation” and demand by the global overall The recovery of crude oil, the past month the slope of price increases slowed down significantly, which means that the market for inflation and liquidity tightening is also expected to slow down; accordingly, demand mainly relies on developed countries, and there is a Biden base construction and new energy and other incremental non-ferrous demand such as copper is relatively less affected, so the trend is better than crude oil, but its pull on inflation compared to crude oil is also weaker.