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From black swans to flightless doves


Back in mid-January, when only a handful of coronavirus cases had been confirmed in China, we argued in Lack of US market & macro volatility both reassuring and troubling that “the market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle”.

That unknown unknown, commonly referred to a “black swan” event, has turned out to be a global viral pandemic on a scale not seen since the Spanish influenza pandemic of 1918-1919.

The coronavirus outbreak is now over two months old but governments, central banks, corporates and household still face a number of known unknowns, namely how many people are and will be affected and when and how fast (or slowly) global economic growth and financial markets can recover.

True number of coronavirus cases still the critical but elusive variable

The rate of increase in the number of daily recorded cases (people who have been clinically tested and found to be carrying the virus) and deaths has accelerated sharply in the past fortnight, particularly in Europe. As of today, over 350,000 people have tested positive for the virus, of which over 15,000 have died and 100,000 recovered, leaving about 235,000 active cases.

However, the critical variable is still arguably the total number people who currently carry the virus, which includes people who have the virus but have not been tested (and thus not been included in the official count). This number has proven very difficult to guage accurately because of limited testing. So far only one in 22,000 of the world’s population has been tested according to our estimates. Put differently, in many countries the sample of people who have been tested has been statistically insignificant. Moreover, the picture is complicated by the fact that, according to recent reports, people may be carrying the virus (and thus be contagious) but remain asymptomatic.

In the face of this potentially game-changing “known-unknown” many governments have taken what could arguably be termed the path of least regret, which has included greatly intensifying measures to self-isolate people. Italy – which is now in full lockdown – has led the way in Europe and other governments are following in its footsteps, albeit with a lag.

Figure 1: Developed and more recently emerging market central banks have cut policy rates aggressively

Global Central Bank Policy Rate

Source: 4X Global Research, IMF, national central banks

Note: GDP-weighted average of central bank policy rates in developed economies – Australia, Canada, Denmark (deposit rate), Eurozone (deposit rate), Japan, New Zealand, Norway, Sweden (repo rate), Switzerland (3m SIBOR until June 2019 then policy rate), United Kingdom and United States – and emerging markets – Brazil, Chile, China (1-year Loan Prime Rate), Czech Republic, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Nigeria, Philippines, Poland, Romania, Russia, Singapore (overnight rate average), South Africa, Taiwan, Thailand and Turkey.

This time round fiscal stimulus the equal to monetary policy easing measures

Central banks all over the world are loosening monetary policy, with major developed central banks also turning on the liquidity tap in a bid to mitigate the acute, yet impossible to accurately quantify, economic cost of measures designed to slow the spread of the coronavirus and to shore up stressed, and at times dysfunctional financial markets.

In Australia, Canada, New Zealand, Norway, the UK and US and in many Emerging Market (EM) economies central banks have in the past eight days cut their policy rates further (see Figure 1) and we expect EM central banks, which are now playing catch-up, to continue cutting their policy rates going forward.

However, for developed central banks the room for further rate cuts is now extremely limited, with the weighted-average policy rate in negative territory for the first time in at least 15 years, according to our estimates (see Figure 2). Unsurprisingly perhaps the Federal Reserve, European Central Bank and Bank of

England have re-started their asset-purchases programs while the Reserve Bank of Australia, Reserve Bank of New Zealand and National Bank of Poland have initiated QE for the first time.

Figure 2: Developed central banks have cut policy rate into negative territory and are now turning to QE

GDP Weighted Average Central Banks Policy Rates

Source: 4X Global Research, IMF, national central banks

Moreover, in the past week the Federal Reserve has announced that it will:

  1. Start buying commercial paper (as it did in GFC) – a critical source of short-term cash for companies – to palliate money market funds’ loss of appetite for commercial paper (17th March);
  2. Expand its Dollar-swap line to a further nine major central banks (19th March); and
  3. Enhance liquidity, along with five other major central banks, in US Dollars by holding more frequent (i.e. daily) currency swap operations (20th March).

These monetary and market measures are clearly only part of the solution and probably not the most important one, at least in terms of addressing the collapse in global domestic demand and global supply. Anecdotal evidence suggests that consumers, even those with still healthy bank balances and jobs, are being forced indoors and by default spending far less than they normally would and even less than they did during the 2008-2009 Great Financial Crisis. Companies have all but shelved investment plans or worse,

as increasingly the case, simply stopped trading. This will likely start to be reflected in macro data for March, including composite PMI figures for the UK and Eurozone due out tomorrow. Governments as a result have announced emergency fiscal stimulus programs on a scale which dwarfs those announced during the GFC. Governments are effectively acting as a substitute, however imperfect, not just for banks and lenders but for consumers and corporates.

Currency trends are being tested, with one notable exception

Individual currencies’ response to this complex and rapidly changing matrix of government and central bank measures – themselves a by-product of the evolution of a virus which is throwing up more questions than answers – has been far from uniform. Moreover, until-now reasonably well-established trends have broken down, if not reversed, in line with our expectations (see The trend may not be currencies’ friend in very volatile markets).

The Dollar has been one of the rare exceptions, with the insatiable demand for Dollars (from households, corporates, banks and governments) meeting severe supply constraints. The Dollar Nominal Effective Exchange Rate (NEER) has appreciated about 4.2% in the past week and is up 9.2% from a month ago, to multi-decade highs (see Figure 3).

The Federal Reserve’s recent measures to ease these tensions in the Dollar-market, as detailed above, have so far had little impact on the Dollar’s ascendancy and the jury is still out as to whether they will any time soon. Even the US Senate’s failure yesterday to approve a $1.6trn emergency fiscal package has seemingly failed to dissuade the world that the Dollar is now the default safe-haven of choice.

Figure 3: Dollar still on the up but Sterling and Australian and Kiwi Dollars have found their footing

Nominal Effective Exchange Rates

Source: 4X Global Research, BIS, national central banks,

While the Dollar has continued to trend higher, Sterling and the Australian and New Zealand Dollars – which had been in free-fall, have since the middle of last week traded sideways in NEER terms (see Figure 3). Similarly, the Euro, which until early March had matched the pace of Dollar appreciation, has been stuck in a range of 1.5% in the past seven trading sessions.

We argued ten days ago that “an unwinding of substantial, long Sterling positions would result in an acceleration in Sterling’s recent depreciation” and over that period we estimate that indeed the Sterling NEER has weakened over 3%. While net-long Sterling speculative positions fell only marginally in the two weeks to 17th March, asset managers and other reporting institutions’ net-long positions have gone from very positive to very negative in the past month according to COT data. The Bank of England’s emergency rate cut of 50bp on 11th March to 0.25% did nothing to arrest Sterling’s downward spiral and its 15bp rate cut on 19th March to a new record low of 0.1% only saw Sterling appreciate incrementally.

However Sterling did rebound 1.3% on Friday after the British Chancellor of the Exchequer Rishi Sunak announced a fiscal package which would include underwriting 80% of UK workers’ wages up to £2,500/month. Markets, it would seem, are giving greater billing to imaginative fiscal measures than to old “tried-and-tested monetary measures. All eyes are now on the US Senate.

For further information about 4X Global Research or to discuss a subscription to its research products and services, please email odesbarres@4XGR or call Olivier Desbarres on +44 (0)20 3811 0454

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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