Morning Commentary: Nothing to Fear but Fear Itself

Foreign Exchange - Morning Commentary
Nothing to Fear but Fear Itself
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
This past week, markets have been rocked by Covid-19 fears with the equity markets down sharply again today.    

There is no denying the severe welfare cost of the Covid-19 outbreak, but on a health impact basis alone, the global growth impact shouldn’t be that great; for example, the Sichuan earthquake in 2008 killed 69,000 people and didn’t make a material impact on Chinese growth.  For comparison, the Covid-19 death toll is around 4% of this number.  Moreover, the fatality rate (so far) of 2% is much lower than for SARS (9.6%), MERS (34.4%) and Ebola (70%).     

Instead, it appears that the fear of the virus, rather the virus itself, is the main driver of economic uncertainty.  Case in point, in South Korea, where the virus is spreading rapidly, movie theater attendance has dropped by ~40% from the prior year despite the Covid-19 death toll being roughly equal to the number of people who die from the flu in a single day. 

Moreover, the sweeping measures taken by China are largely unprecedented.  By locking down the Hubei province, home to 60 million people, economic activity has grinded to a halt.  This comes as China represents a much larger portion of the world economy and global supply chains than during previous outbreaks.  Adding to the chill in commerce has been similar sweeping actions taken by other countries.     

To be clear, this isn’t to downplay the severity of the outbreak as it is a serious situation.  It is simply to highlight the powerful impact that uncertainty has on the global economy. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
 
  • Covid-19 headlines continue to dominate the markets with the most notable swing in negative sentiment occurring in Europe and the US.  There are now more new cases reported outside of China than inside of China.  Notably, the US reported its first infection case of someone with no connection to traveling abroad. 
  • US durable goods orders came in better than expected, but markets are looking through this and focusing on the Covid-19 headlines.  The US 10-year yield continues to drop, hitting a new all-time low of ~1.2673% today.  The Fed and the BoC have relatively more room to cut than other central banks such as the ECB, a fact represented in the price action.  
  • UK-EU trade negotiations continue to escalate with each side hardening its stance through calls for red lines and a level playing field.  
  • The central bank of Mexico released its inflation report yesterday.  As expected, the midpoint growth estimate for this year was reduced by 0.3 bps to 1%.
  • The Bank of Korea surprised markets by leaving its policy rate unchanged at 1.25%.  From the statement, it appears that the bank prefers to be more “reactive” due to fears of limited ammunition and side effects of low interest rates. 
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