Why “Return by Easter” is an Economic Pip Dream

Posted on

March 27, 2020
Equities pull back
Dollar finds a bid
Nikkei -3.88% Dax -2.11%
UST 10Y 0.771%
Oil $22/bbl
Gold $1622/oz
BTCUSD $6640

Asia and EU
No Data

North America Open
USD PCI 8:30

After a strong risk-on rally yesterday markets in Europe turned sour with index futures off by more than -2% in the morning dealing while the greenback strengthening again.

European finance ministers failed to come up with a comprehensive pan- European plan to finance response to the coronavirus with Germans once again scuttling plans to issue mutually guaranteed bonds. This leaves ECB as the only pan-European institution to act for the union now and investors are understandably concerned that a monetary response will not be enough to create stimulus in the region.

We’ll see if the pressure grows strong enough for Germany to finally cave in on a Pan-European fiscal plan but until such time the credit stress in the region will persist and dollar bid should stay in place.

In North America today the markets will await the passage of the 2T stimulus bill by the House which looks to be a foregone conclusion by may provide a small bounce to equities. Meanwhile, the situation on the ground remains grim with the US now having the largest amount of cases in the world with the New York tri-state region responsible for nearly half of all cases.

The President floated the idea of a “partial” return to normalcy by Easter targeting policy directives by county level, but in truth, he does not have the power to force people back to work – that power lies with the Governors who are not likely to risk reinfection just for a few more days of expediency. Furthermore, even if the US was to return back to a semi-normal state of operation the state most affected by the virus, the state with the least possibility of a quick rebound are also the states that are the most economically productive. Taken together, NY tristate, California, Illinois, Georgia, and Florida are responsible for more than 1/3rd of all US economic output and within those states, the counties that are most affected are the urban counties that are the most economically dominant.

Therefore, any lift of the lockdown will have a much smaller economic impact than the market thinks and that, in turn, suggests that risk-off flows will resume

Boris Schlossberg
Managing Director

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