Optimism Reigns on Not Much

Italy, the new hotspot Spain and the UK have all reported a decline in the daily death toll, from a humanitarian perspective this is great news. President Trump also appears to have dialled back the severity of his warning, at the latest COVID-19 White House presser stated the outbreak was perhaps “levelling off”. "We see light at the end of the tunnel. Things are happening," Trump said, however we would still caution that the road ahead (or tunnel) is long and winding. A levelling off of cases could be more akin to the end of the beginning, rather than the beginning of the end as the real economy effects play out.    

When it comes to the real economy effects and second order impacts of the COVID-19 containment measures, these show no sign of levelling off making the days exuberance look rife with complacency. This as Japan moves to declare a state of emergency April 7, Singapore locks down once again and pockets of emerging markets stresses show little sign of abating. The pressure of dollar strength and funding squeeze continues, although swapped lines have helped and dollar borrowing premiums have lessened. The sharp devaluation across multiple EM currencies may eventuate unintended economic dislocations that have capacity to spark risk whilst sentiment remains fragile. Flexible exchange rates will absorb the economic shock to a point before presenting secondary consequences.