Morning Commentary: The Most Important Thing

Foreign Exchange - Morning Commentary
The Most Important Thing
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Yesterday brought the markets a slew of PMI data points which gave us the first look at how the COVID-19 outbreak is impacting the economy.  However, the most important data point this week isn’t economic news or the size of any stimulus plan.  Instead, it is how successfully Italy has been in containing the virus as Italy is a good indicator of what is coming to the rest of the developed world. 

Italy reported its first COVID-19 case on February 21 and moved to a nationwide shutdown on March 11.  During this period, there was an exponential growth in the number of COVID-19 cases.  Since March, the number of cases has quintupled which raises the question of whether social distancing is working. 

To this, we take the view that the rise in cases post shutdown reflects the 14 days it takes for the virus to incubate.  As such, we are now entering a critical period as the upcoming days will truly tell the effectiveness of Italy’s measures.  There have been some positive signs as the growth rate in new cases has slowed by ~10% over the past couple of days, but it will take more time to confirm the persistence of this decline as yesterday’s uptick in cases illustrates.   

Over in the US, we are most likely trailing Italy’s path by a few weeks with the number of cases in the US following a similar path to Italy.  As a result, the bad news is that the US is likely to remain on a steep upward slope of increasing COVID-19 cases for a while.  The good news is that Italy appears to be following China’s path which bodes well for the ability of Western democracy to stop the virus through social distancing.  This is key because having a sense of when the virus outbreak will peak is required for markets to stabilize and for confidence to return. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The US Senate finally was able to reach a deal on its stimulus bill.  Details are still being ironed out, but the bill is expected to total around $2 trillion and include around $350 billion for small businesses and $150 billion for hospitals and healthcare providers.  There will also be direct payments of $1,200 per adult and $500 per child for low- and middle-income families.  Unemployment insurance is extended to four months and has been expanded to cover more workers. 
  • The Canadian government was also able to come to agreement on a stimulus package worth around C$82 billion.  However, Canadian initial jobless claims spiked to nearly 1 million claims or ~5% of the workforce.  The US reports its initial jobless claim number tomorrow with market consensus expecting 1.5 million claims. For scale, last week’s print was 281k. 
  • The pound is bid this morning as a report out of the University of Oxford indicates that hospitalization rates in the UK could be less than Italy. 
  • India announced a nationwide lockdown yesterday and the Bank of Thailand kept rates steady at 0.75% after delivering an emergency 0.25% rate cut last Friday. 
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