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Risk on Flows as Virus Spread Slows




Global equities, AUD and NZD are benefiting from BIG risk on flows this morning. The S&P 500 is trading roughly 3.7% higher, while the Euro Stoxx 50 and DAX are some 4.5% and 5% higher. Meanwhile, AUDUSD and NZDUSD have rallied some 75 pips each since the reopen of trade on Sunday evening. 

Markets are cheering a weekend of good news on the Covid-19 front; the latest evidence suggests that Spain, Italy and most likely also France are past the peak in terms of hospitalization, intensive care needs and daily fatalities due to Covid-19. 

The same also seems to be the case on hospitalization data from New York, which has come as a surprise; most weren’t expecting hospitalisations to start to drop for a few days yet. 

Risk on flows are having their typically negative effect on havens. JPY has been worst hit today; USDJPY today soured back above 109.00. US and German government bond yields have also been rising. 

In terms of the latest statistics out of Europe; Spain reported new virus cases at its lowest since March 22nd, with cases rising to 4237 to just over 135k. Moreover, the death toll rose by 637 to just over 13k, its lowest daily increase since March 24th.

Meanwhile, Italy’s death toll rose by a further 525, its smallest daily increase since March 19th, while the number of cases rose by 4316, the slowest pace of increase in 5 days. 


Though deaths are still high all of these regions, trends matter here. 

A slowing death rate suggests the spread of the virus is being brought under control in these areas, raising hopes that lockdowns could be ended/there could be a return to normal life sooner than previously thought.

In fact, one European country has already indicated when it will reopen its economy; Austrian officials revealed plans to reopen most small stores and DIY shops from April 14th and most other shops from early May. 

Moreover, Germany outlined one of the conditions it would like to see before it begins to reopen the economy; if the infection rate falls below 1 (when one person on average infects less than one other people), easing of restrictions can begin. 

Even if we do see lockdowns eased sooner than thought, markets might be jumping the gun here a little. 

According to Deutsche Bank, behavioural changes are likely to slow growth over the coming quarters regardless of whether the lockdowns are substantially eased. 

To name a few reasons why, Deutsche Bank predicts that houses will save more (and spend less), fewer people will go on vacation, at risk groups will likely continue to self-isolate out of fear, less people willing to use public transport. Moreover, global travel restrictions are likely to remain in place, there may be regulations on large businesses to hold three months of emergency cash, there may be more spending on health care and more supply of government bonds (increasing the risk of a debt crisis). 

All of these behavioural changes imply that the economy is not going to just automatically recover right back to where it was prior to the outbreak. Rather, even in the most optimistic scenarios, most economists do not expect GDP to return to pre-Covid-19 crisis levels until at least 2021. Much more likely is that a full recovery will take until 2023. 

A 20-30% Y/Y drawdown in global equities might not yet be nearly enough to reflect this new reality. 

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