The Morning Commentary: The 3C’s

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

The 3C’s Share this story: Andrew Kositkun Foreign Exchange Head Trader

Across the world, the appetite for blanket shutdowns has waned.  Going forward, virus mitigation will be done through a combination of targeted measures, voluntary steps and immunity.  The effectiveness of these steps all rely on the powerful principle of heterogeneity.  It is well accepted that different forms of economic activities spread the virus more than others.  This dispersion increases the “bang of the buck” from measures that target certain sectors.  Countries have seized on this fact and focused on the 3Cs of closed spaces, crowded places and close contact conversations to identify super spreading events.  Japan’s virus response is probably the most explicit example of this with the country cancelling sporting events and closing bars and gyms while keeping other parts of the economy open.  The second type of important heterogeneity is the different levels of vulnerability among people.  A recent paper from MIT considered the impact of various types of policies including uniform lockdowns, measures that are more targeted, and systems of testing, tracing and isolation.  What the authors found is that better outcomes are possible if blanket lockdowns are replaced by targeted measures.  Specifically, the researchers found that longer and stricter lockdowns for older people combined with less strict and shorter lockdowns for everyone else results in a better death/output loss trade off relative to uniform shutdowns.  This result improves further if “group distancing” that limits contact between vulnerable people and the rest of the population is added in.  Finally, a system of contact tracing and isolation provides another level of improvement.  Heterogeneity should allow countries to use a scalpel (via policy or voluntary behavior) and not a sledge hammer to combat virus outbreaks.  This is clearly a good thing for the economy and represents one of the arguments for why the current surge in infections will cause a leveling off of activity rather than a collapse.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: Coronavirus infection data continues to trend the wrong way.  The US recorded ~70K new cases yesterday, setting a new daily record.   Globally, India has surpassed 1 million total cases and Japan set a new daily record for new cases with cases also rising in Australia, Hong Kong and the Philippines among others. Congress returns from recess on Monday and has a small window to strike a deal on another stimulus package with both sides still far apart.  Case in point, President Trump insists that a payroll tax cut must be included.  This is a deal-breaker for Democrats and some Republicans as it will not benefit those that are unemployed.  To this point, the $600/week enhanced jobless benefit is set to expire at the end of the month. The EU Summit will be held today and tomorrow in Brussels.  The Frugal Four countries continue to represent opposition and German Chancellor Merkel has expressed caution on wrapping up the rescue package this month.  Nevertheless, the view still remains for a deal to eventually get done.

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