Category: ENG

Coronavirus: an update with facts, figures and a few questions

The new coronavirus – COVID-19 or MERS-COV 2 – crossed the 10 million mark of reported cases and inflicted half a million deaths. Although many countries have managed to contain the spread of the pandemic, the number of reported cases and deaths continues to increase. the worst is yet to come, according to remarks made on June 29 by the WHO Director-General. How have different countries across the world dealt with the pandemic so far ? What is the effect of lockdowns on deaths from the COVID-19? Is there a risk of a second wave of the pandemic after the end of the lockdowns and the easing of social distancing measures?

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Macro focus: How resilient are the GCC economies to the coronavirus recession?

The GCC countries have been hit hard by the most severe macroeconomic shock in their history as independent nations. The collapse of oil prices earlier this year dealt a heavy blow to oil exporters all around the world. While some of the GCC countries are among the most wealthy nations on earth, the oil crisis caused their fiscal balances and their current accounts to deteriorate sharply in the face of the twin oil shock and demand crisis provoked by the coronavirus. Beyond some common features, there are disparities in terms of resilience to the crisis and capacity to deal with its consequences. Leaving appart the special case of Dubai and to some extent Bahrain, the GCC governments must accelerate their efforts to transform their economies.

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Macro Focus: Discretion over rules. The Federal Reserve’s “puzzle and conquer” strategy

From its latest moves, it appears that the Federal Reserve has two important messages for the markets and for everyone else. 1. Don’t fight the Fed. 2. Don’t expect any guidance from the Fed.
These two messages are two facets of the same “puzzle and conquer” strategy that seeks to provide support to the economy and to the markets while preventing the spread moral hazard and the build-up of self-fulfilling market bubbles. This strategy is risky as it may err on either side by untertaining a haze of uncertainty over its course of actions. However, it is probably the best strategy as long as the macro outlook and the fiscal side of the policy mix equation remain difficult to project.

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Market Focus: How long can the market rally last?

Despite all the macro projections that tend to discard a V-shaped recovery, the markets seem for now to price in such a scenario, perceiving the profile of the current recession to be more similarities with the 1991 and the 2001 recession than with the more severe recession associated with the GFC in 2007-2008. The probability of a sudden reversal in market sentiment following some unexpected bad news looks increasingly high. An abrupt end to the ongoing euphoria should not be dismissed. Hedging this potential outcome by buying equity puts or VIX calls might be a good way to prepare for this eventuality while preserving the gains achieved during this unprecedented rally.

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Macro Focus: ECB macro projections and the PEPP extension: shooting in the dark

Following the meeting of its Governing Council on June 4, the ECB announced an extension of its Pandemic Emergency Purchase Programme (PEPP) with an additional enveloppe of €600 billion. The total asset purchases made by the Eurosystem (ECB+ National Central Banks) to counter the coronavirus crisis including PEPP and additional APP purchases is now expected to reach almost €1.5 trillion. The bleak outlook for inflation shows the profound deflationary forces at work in the Euro area. Judging from the experience of the last few years, we believe the ECB’s assessment of an uptick in core inflation by 2022 to be too optimistic.

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Macro Focus: An analysis of the European Commission’s Next Generation €750 billion recovery plan

the European Commission unveiled a €750 billion “Next Generation” recovery programme (€440 billion grants, €60 billion guarantees and €250 billion loans) over the 2021-2024 period. The Next Generation programme would preallocate funds to the Member States prioritising the green and digital transitions mainly through the Recovery and Resilience Facility (€560 billion). It includes additional cohesion funding for €45 billion. As we show in our analysis, Italy, Spain, Poland, Greece, Romania and Portugal would be the main beneficiaries of this proposal which is likely to meet resistance from the “Frugal four” (Netherlands, Austria, Sweden, Denmark).
For the first time in EU history, fiscal expenditure would be financed through debt issued by the European Commission and backed by all the Member states, along the line of a French-German proposal. However, while this proposal is a welcome step toward fiscal integration, it is still short of a Hamiltonian moment for Europe”. The countercyclical policies needed to close the output gap left by the coronavirus crisis will still have to be conducted at the Member State level.

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Macro Focus: Nowcasting 2020 Q2 GDP and forecasting Unemployment over the 2020-2022 period.

Our nowcasting model shows that US GDP might fall by -29% in 2Q 2020 and that unemployment might take up to three years to return to its pre-crisis levels. These results cast additional shadows over the assumption of a V-shape recovery for the US economy, which has already been abandoned by the Federal Reserve.

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Market Focus: Increased dispersion in Emerging Markets amidst an uncertain outlook

the economies of Mexico, Brazil, Russia, India, Indonesia, South Africa and Turkey have all been hit by the coronavirus crisis. EM currencies, equities and bonds have been particularly impacted by the global market fallout that occurred in February-March 2020. As has been documented by the IIF, Global investors pulled out their funds at record speed during that acute episode of market stress. Since then, the volatility of DM and EM markets has somewhat receded and the general sentiment toward risky assets has improved, not the least because the world’s major central banks committed trillions of dollars to support the markets and to put a de facto backstop on assets valuations . However, EM assets remains vulnerable to new waves of volatility and risk aversion that would trigger additional capital outflows.

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Macro Focus: Minutes of the FOMC April 28 meeting and Chair Powell testimony before the Senate.

TThe FOMC April 28 meeting minutes provide some glimpse into the Federal Reserve’s early assessment of the crisis triggered by the coronavirus pandemic, the outlook for the US economy over the coming months and quarters. Fed Chair Powell testimony on May 19 before the US Senate Committee on Banking, Housing and Urban affairs offers additional insights into the Fed’s current thinking and options to contain the economic impact of the coronavirus crisis and to speed-up the recovery of the US economy.

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