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We’re Beyond Coronavirus

The rout in risk assets is no longer just about the coronavirus. Yes, we can highlight a dozen economic negatives directly from the virus but we have gone beyond that, or a close to that point. We are not efficient market proponents, but the market is certainly capable of looking out beyond a year or two when we will recover from the virus.

Even in a worse-case scenario of about 4% global mortality, you could argue that several assets are underpriced. Yet, what’s being priced in now are the second-order effects. There are increasing solvency risks in the energy sector and mass bailouts in aviation are already underway. The entire hospitality industry is under threat with countless small restaurants and businesses likely to be pushed over the edge.

An early tell on how the government will proceed, is the structure of an airline bailout. The WSJ reports the White House is looking at $50B for airlines in an expensive precedent. The report says one of the possibilities is cash grants, and that’s a borderline-dangerous precedent. Ashraf estimates that by end of June, bailouts and federal govt assistance will reach a total of about $500 bn or about 3% of US GDP.

While the market may initially cheer anything that safeguards shareholders, that may quickly prove to be shortsighted. Not only will it escalate costs and deficits but it raises the risk of social disruption. This is the time when the moral hazard from the 2008-09 bank bailouts looms large. Everyone wants, expects and demands a bailout now.

That’s going to prove to be impossible. What the market is pricing in – at least partially – is social and political disruption. We have written often in the past year about the growing fractures in politics as many countries diverge from the center. This event is another spark that will light fuses around the world.

In FX, the yen continued to gain ground in the volatility as the classic safe havens rose. USD/CAD hit 1.40 for the first time since 2016 and remains far too low for a global recession.

We got a first taste of the scope of the US slowdown Monday with the Empire Fed falling the most on record in a single month. It plunged to -21.5 from +12.9. That’s merely the leading edge of the economic cliff of coronavirus. Another real-time data point to watch will be Tuesday’s German ZEW survey. The consensus is a drop to -27.2 from +8.7.

Ashraf Laidi
Ashraf Laidihttp://ashraflaidi.com/
Ashraf Laidi is an independent strategist and trader, founder of Intermarket Strategy Ltd and author of "Currency Trading & Intermarket Analysis". He is the former chief global strategist at City Index / FX Solutions, where he focused on foreign exchange and global macro developments pertaining to central bank policies, sovereign debt and intermarket dynamics. Ashraf had also served as Chief Strategist at CMC Markets, where he headed a global team of analysts and led seminars and trainings in four continents. His insights on currencies and commodities won him several #1 rankings with FXWeek and Reuters. Prior to CMC Markets, Laidi monitored the performance of a multi-FX portfolio at the United Nations, assessed sovereign and project investment risk with Hagler Bailly and the World Bank, and analyzed emerging market bonds at Reuters. Laidi also created the first 24-hour currency web site for traders and researchers alike on the eve of the creation of the euro. Laidi's analysis of currency markets stand out based on his distinct style in bridging the fundamental and technical aspects of the markets. Laidi regularly appears on CNBC TV (US, Europe, Arabia and Asia/Pacific), Bloomberg TV (US, Asia/Pacific, France and Spain), BNN, PBSs Nightly Business Report, and BBC. His insights also appear in the Financial Times, the Wall Street Journal and Barrons. He has given numerous interviews and lectures in Arabic, French, and to audiences spanning from Canada, Central America and Asia/Pacific.

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