Morning Commentary: Out of Sight but not Out of Mind

Foreign Exchange - Morning Commentary
Out of Sight but not Out of Mind
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Countries around the world continue to re-open, either on or ahead of schedule, as the global population tires of the lockdown and justified concerns around the economic damage of lockdown emerge.  There also appears to be a shift in the policy approach to the disease as re-openings despite the course of the coronavirus.  Case in point the number of new global cases has risen to an average of 139K over the last 7 days from 122K the prior 7 days.  This suggests that the “better safe than sorry” approach has been replaced by a higher threshold for the tradeoff between health and economic results.   

Of course not all the virus news is negative.  The EM is showing a lower death rate than experienced at the peak in the US and Europe despite the curve not being bent in several countries.  Possibly this is due to a younger population outweighing the lack of a strong healthcare system.  Although significant under-reporting could also be at play.  In the US, previous hotspots such as New York have shown steady improvement.  However, now hotspots such as Texas have popped up. 

In a nutshell, markets are trying to fight thought crosscurrents as they are being driven by concerns around rising infections and optimism around re-openings and policy support.  Recent price action suggests that the markets are siding with the optimistic point of view and economic data supports this.  But the better incoming data represents low-hanging fruit.  The bigger question is what happens after the initial bump. 

To this question, there appear to be three key risks.  The first is whether or not the virus comes back and trigger the reversal of re-opening.  It should be noted that leadership appears to be more willing to accept a worse health outcome for a better economy.  The second is the fiscal/monetary policy fatigue.  Governments have been aggressive with policy response.  However, monetary policy is running out and additional fiscal policy could be slower with acute economic pressure subsiding.  The final risk is that of second-round shocks.  Recessions aren’t just triggered by initial shocks but also by the subsequent negative feedback loop.  It is fair to say that many industries will not return to full capacity for the foreseeable future and this could lead to bankruptcies even as re-opening continues. 

This uncertain environment makes the timing of the new turnaround less relevant than what the “new normal” will be like once the mechanical bounce is over.  With growth numbers distorted by base effects and massive stimulus pushing up equities prices, unemployment and the output gap measures will likely provide a better gauge of economic progress.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The Asian and European sessions kicked off with concerns around a second wave of infections but that concern appears to have faded.  Increased infection numbers continue to come out of Germany and China with India and Brazil also areas of concern.  It should be noted that many areas are also testing at a higher rate so a rise in infections is expected a partially explains the rise in infection numbers. 
  • In the US, virus news remains mixed.  Florida, California, and Arizona continue to see an increase in infections.  Conversely, New York is moving to Phase 2 of its re-opening plan.   
  • After the disappointing results from this weekend’s rally, the market-implied odds for Trump’s re-election dropped 3% to 39%. 
  • The UK government is discussing another round of stimulus with a temporary cut to the VAT tax being one of the main measures being discussed.  It has also been reported that the government plans to reduce the 2-meter social distancing rule.  While this would increase the capacity for reopening business, such as restaurants, studies show the risk of infection at 1 meter is twice that at 2 meters.
  • RBA Governor Lowe expressed his preference for a weaker currency but also acknowledged that he has no issue with the AUD’s recent run of strength.  
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