Morning Commentary: Coming Soon: Grand Reopening

Foreign Exchange - Morning Commentary
Coming Soon: Grand Reopening  
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Yesterday, President Trump outlined guidelines for reopening the economy.  States will bear the responsibility for reopening each respective economy, but no specific timeframe was given.  News of the reopening plan combined with reports out of the Chicago trial of Gilead Sciences’ drug remdesivir showing promise in treating COVID-19 patients have put the markets firmly in risk on mode. 

While both headlines are positive, it is important to take headlines in context.  Recent news headlines regarding China have indicated things along the lines of “95% of major construction material enterprises” have restarted production or “85% of house and municipal infrastructure projects” have resumed construction.  On the surface, these headlines are positive, but they also mask reality as companies have resumed operations but remain well below normal capacity.  Point being, even with more extreme social controls, China’s economic restart remains slow and uncertain.

Given weaker social interaction controls, expect Western democracies to take even longer to reopen without a reemergence of the disease.  Manufacturing and construction-type industries are likely the first to open.  The more automated the process, the quicker that process can reach full productivity.  The retail sector likely reopens with a similar social distancing dynamic as is currently in place with supermarkets.  Office work likely resumes with some sort of rotation system that still relies on people working from home.  Layering on top of all this will be the density of each individual city.  New York and many large European cities rely on public transportation and have high population density.  These issues present obstacles to normalization.      

These are unprecedented times.  With no historical precedent to draw from, monitoring the developments in Asian and European countries that are ahead of the US on the infection curve provides the best benchmark on what to expect in the US once the country begins normalization.  
  • Regarding the US’ plan to reopen the economy, the move will come in 3 phases.  Governors will need to choose between a statewide or a county-by-county approach.  The standards for reopening include a “downward trajectory of documented cases within a 14-day period” or a “downward trajectory of positive tests as a percent of total tests within a 14-day period” to proceed to the next phase. Under the first phase, large venues would reopen with “physical distancing protocols.” The third phase would include the “unrestricted staffing of worksites.”
  • The UK government announced that lockdown measures would be extended by three weeks to at least May 7.
  • China’s economy contracted 6.8% on a year-over-year basis in the first quarter.  This was the first contraction since 1992 when the official releases of quarter GDP first started.  Chinese officials pledged to deliver more stimulus, including more interest rate cuts, on the back of this weak economic print. 
  • Japanese industrial production fell -5.7% on a YoY basis, reflecting the impact of the virus.  Yesterday, Japan expanded its state of emergency to the entire country.
  • The ECB has announced capital relief for trading activities and lowered capital requirements for banks.  This should allow capital constrained banks in Europe to take on additional risk. 
  • Oil price continue to fall, with oil down over 10% in today’s session.  As touched on in past commentaries, the demand shock has been much greater than OPEC’s historic production cut.  To this end, Saudi Arabia and Russia have discussed imposing deeper production cuts. 
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