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Testing to Reopen

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As the number of COVID-19 cases rose above 3 million worldwide on Monday Brian Belski, Chief Investment Strategist at BMO Capital Markets, moderated a roundtable discussion with BMO experts to discuss the latest developments in the outbreak. Joining him on the call were Michael Gregory, Deputy Chief Economist at BMO Capital Markets, Margaret Kerins, Head of FICC Macro Strategy, BMO Capital Markets, and George Farmer, Biotechnology Analyst, BMO Capital Markets. Special guest Dr. John Whyte, Chief Medical Officer of WebMD, joined the call to discuss the week’s most recent medical developments.

BMO COVID-19 Insights podcast is live on all major channels including AppleGoogle and Spotify.

Dr. Whyte opened the call to say more testing will be critical to better understand the evolving profile of the COVID-19 outbreak in North American as authorities weigh an economic reopening. read more


Citing from a report by the Rockefeller Foundation, whose mission is to promote the well-being of humanity throughout the world, Dr. Whyte underscored how much more work needs to be done. According to Rockefeller, he said, testing needs to be ramped up to 30 million per week, compared to some 3 million tests done since the outbreak began.

“So testing does remain a critical concern,” said Dr. Whyte. “Can we get to 30 million a week by June? I'm not sure. But let's start thinking about how we use it on a wider scale,” he said.

For any sort of return to normal, Dr. Whyte said, testing will need to become more comprehensive as well as more efficient, but there are signs progress is being made.

There is now a saliva test to diagnose coronavirus which health experts believe is as accurate as a nasal swab, for example, and while authorities are still learning whether the presence of antibodies in a person means immunity, Dr. Whyte suggested that is likely the case.

As of Monday there were over 3 million cases of coronavirus globally, resulting in over 200,000 deaths.

In Canada, there had been 46,898 cases, with 2,560 deaths, but evidence of recent days has shown the spread of the virus is slowing, with the death toll rising by less than 10 percent per day for nine days in a row.

In the United States, as of Monday, the country had reported nearly 1 million cases and over 55,000 deaths, with over half of those concentrated in hotspots including New York, New Jersey, Massachusetts, Illinois and California. Some 40 percent of Americans say they know someone who has tested positive or think they have had the coronavirus and 10 percent said they know someone who has died from complications from the disease.

Return to Work

Businesses are sufficiently encouraged with the decline in numbers to have begun talking in earnest about what a return to normal might look like, including the use of office space. Will offices need to be retrofitted? Will heating and air conditioning need to be reconsidered? Should businesses look at how to time-shift people's work in the office?

“I'm optimistic that we're sorting out a strategy of the key to reopening. We're talking about it based on risk in science. And I think we're going to continue to see progress. And we have implemented effective strategies.”

Elusive Treatments

In terms of treatments, according BMO Capital Markets Biotechnology Analyst George Farmer, there has been some discouraging news.

One of the most talked about treatments, hydroxychloroquine, has proven to be less effective than originally thought. Initial studies, Farmer said, did not have a control arm, making it difficult to definitively conclude that improvements were due to use of the drug.

“There was a study out of China, the first randomized study, which showed some interim results and did not see any difference between patients treated with hydroxychloroquine or just standard of care,” Farmer said.

Further to this, the FDA has recommended against hydroxychloroquine for treating COVID-19 patients outside of a hospital-based setting.

With regard to antivirals, Remdesivir by Gilead has received a lot of press for what looks like positive activity in American trials, but Farmer said trials were without a control and have proven disappointing. As was the case with hydroxychloroquine, a randomized study in China has indicated there was no difference in outcomes between the drug and placebos.

Vaccine Promise

There was some encouraging news with respect to an RNA vaccine in development by Moderna. The vaccine, which is the highest-profile in development, encodes a key viral protein, Farmer said. “The hope is to get the body to make the protein in its own cells and that that should mount a protective immune response.”

At this point in the trials, it appears the vaccine is safe for humans, but developers are not yet sure whether it creates immunity. Farmer expects that information to come out by the middle of 2021.

Asked by a caller what it will mean to vaccine development if antibodies do not give rise to long-term immunity, Farmer explained that there are two different ways to elicit an immune response, one is to generate antibodies and one is to generate T-cell response, “so I don't think all is lost if we don't see a neutralizing antibody response.”

Massive Economic Contractions

Michael Gregory, Deputy Chief Economist for BMO Capital Markets, said indicators of the economic impacts of COVID-19 on the North American economies continue to paint a gloomy picture. New data to be released in Canada and the United States over coming days, he said, will report some dismal new numbers.

In the United States, where real GDP figures are due out on Wednesday for the first quarter, Gregory said, “we're expecting the economy to contract at more than an 8 percent annual rate with broad based weakness, apart from government spending.”

The Canadian economy will likely show about a 10 percent, annualized rate of contraction in the first quarter, he said. “Canada is faring worse than the US because of the harder hit coming from collapsing oil prices,” he explained.

And finally, Gregory said, “we're bracing for 40% to 45% annualized contractions on both sides of the border” in the second quarter.

Federal Fiscal Packages

Gregory noted that it was interesting that U.S. Congress didn't refer to last week's fiscal package as the anticipated phase four package, suggesting there may be more to come. “It was considered to be more of a stopgap measure and a pretty big one at that.”

According to the Congressional Budget Office, the budget deficit for this fiscal year is already at $3.7 trillion dollars, and debt held by the public  will be hitting 101% of GDP by this September, and both are going to get bigger, he said.

“The key thing is that policymakers on both sides of the border are trying everything to ensure as many businesses and households as possible make it through the crisis.”

Staggered Bounce

When economic recovery occurs, it may come slower than some had hoped, rather than the big rebound experts called for when the outbreak was still unfolding, according to Margaret Kerins, Head of FICC Macro Strategy at BMO Capital Markets.

“We do expect a bounce once businesses get up and running again, however, the openings are likely to be staggered and gradual,” she said, predicting uncertainty will linger well into the second half of the year. “The rebound will be much slower than the sharp decline in economic activity currently underway.”

As government moved swiftly to help provide liquidity to corporate America, Kerins noted a massive rebound in high grade corporate spreads, narrowing 165 basis points since the Fed commitment on March 23 to buy up to $750 billion in corporate debt in the primary and secondary markets.

Corporate debt issuance has skyrocketed in the year to date, up 67% increase over the same period four-year average, Kerins noted.

“The problem is the Fed programs do very little to help the deteriorating financial toll from these loans as they are repaid out of future earnings,” she said.

Since March 16 the Fed has purchased $1.4 trillion in US Treasury, notes Kerrins, while Treasury has issued $960 billion, resulting in a debt issuance available to the public that is negative $433 billion.

“I think the challenge with the market going forward will be to determine how the US economy has been permanently altered,” Kerins said. “And also how long will it take to heal the damage inflicted on the labor force from the Coronavirus.”


Looking at markets, Chief Investment Strategist Brian Belski pointed at the dynamics of futures markets that saw Canada outperform the United States over the past week in terms of energy.

Canadian markets, he said, were showing strong contrarian signals in two of its most important sectors, energy and financials.

“Let's start with energy,” he said. “We're seeing a record type of contango that we haven't seen since 2009, or earlier in the 2000s. Typically, historically, when we see this type of contango in WTI prices, typically we see a very strong market for WTI over the next six to 12 months.”

Turning to financials, Belski suggested some very strong performances might be in store for Canada’s Big Five banks, which have a solid history of paying dividends.

“We typically historically see a very strong contrary signal happen when we see large loan loss provisions spike. Six- to 12 months out following loan loss provisions following 2000 to 2009, we saw very, very strong performance with respect to Canadian banks, especially the Big Five.”

Going forward, Belski reiterated his belief that North American markets hit their bottom on March 23, and that the COVID-19 pandemic served to accelerate an approaching earnings bear market that has hit now rather than in the fourth quarter.

“That only solidifies our call that the bottom is in play,” he said.


Read more
Brian Belski Chief Investment Strategist
Michael Gregory, CFA Deputy Chief Economist and Managing Director

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