Morning Commentary: Mounting Risks

Foreign Exchange - Morning Commentary
Mounting Risks
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The narrative of a second wave of infections is gaining traction in the markets.  This makes Sweden an interesting case study due to its unique approach to the virus.  When most countries were instituting relatively strict lockdown measures, the Swedes took a “lockdown light” that was mainly voluntary.  Given that the US and other European countries are lifting restrictions and converging to the Swedish model, how Sweden has fared takes on additional importance.  

From the data available, Sweden’s model has had positive and negative effects.  On the positive side, Sweden’s recession has been less severe.  According to a recent study, consumer consumption in Sweden dropped 25% versus 29% in Denmark which adopted more stringent measures.  However, Sweden’s per capita death rate was 48.1 per 100,000, much higher than the 10.3 rate in Denmark.  The US has a per capital death rate of 35.5.  

Unfortunately, Sweden has also experienced a spike in infections with daily new cases nearly doubling the 7 day moving average over the past 2 weeks.  While we acknowledge this coincides with an increase in testing, the percentage of tests that come back positive has also risen from elevated levels.  

Pulling back to the US, the rise in cases in some states are offset by falls in others making the aggregate number a noisy data point.  Currently 22 states (17 last week) are seeing an increase in cases.  To an extent, this is an expected development as a reduction in measures designed to stop the spread should lead to an acceleration in infections.  The question is whether or not this can be controlled.  With that in mind, there are 6 states to keep an eye on.  In South Carolina, the number of cases could be much worse than previously thought as testing statistics there have been revised to show a spike in the percentage of positive tests.  This means that the state may have re-opened too soon.  The five other states are Arizona, Alabama, Mississippi, Georgia and Florida.  The share of positive tests are all above the national average in these states and continues to rise.   

Drawing from Sweden’s results, we have learned that it is important to contain the disease then reopen otherwise there is a material chance for the virus to come back again.  While Sweden never had as strict of a lockdown as other countries, it remains stuck at this intermediate level stringency while the rest of Europe continues to steadily re-open.  This means that an earlier re-opening/not shutting down might reduce the economic impact in the short run but could ultimately lead to a bigger net cost over the medium term.  
  • Infections continue to rise in Beijing with travel restrictions being added to school shutdowns.  Europe is also seeing the same slaughterhouse infection issues that hit the US with hundreds of workers testing positive in Germany.  The US is also seeing increased hospitalization in a handful of states.  
  • US initial jobless claims missed expectations as the number came in at 1.51 million against expectations for a 1.29 million print.  However, today’s print was lower than last week’s revised number of 1.57 million claims.  Continuing claims, which is a better measure of longer term unemployment, also missed expectations at 20.5 million against expectations for 19.8 million.  
  • The Bank of England kept its policy rate unchanged at 0.1% but raised its bond buying program by 100 billion pounds.  In other central bank news, the PBoC signaled it will reduce its RRR to keep liquidity ample, and the SNB and Norges Bank both kept rate unchanged with the Swiss central bank signaling further intervention is possible.  The ECB conducted its largest ever liquidity operation with banks drawing 1.3 trillion euros this morning.  
  • Australia reported disappointing employment data with the economy losing ~228K jobs against expectations for a ~79K drop.  The unemployment rate also rose to 7.1% from 6.2% prior.  
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