Submitted by Michael Every of Rabobank
There is really only one headline today – that UK PM Boris Johnson is in intensive care. Indeed, as several medical experts have attested, given the critical shortage of ICU beds he is likely to be on a ventilator very soon.
Of course, he isn’t the first world leader to get the disease, and we have already seen Prince Charles and UK Health Secretary Matt Hancock fully recovery, for example. Nonetheless, the sudden deterioration in his condition comes as a major shock: last week he was clapping on the door step to praise the NHS and was still leading cabinet meetings online; yesterday afternoon we were told he was only staying at home because of an annoyingly persistent temperature; then it was a cough too – but that he was still actively Prime Minister; then he was going to hospital (by car) for some tests; and then he was in an ICU and, apparently, struggling to breathe.
For the UK, this obviously hits confidence and raises questions over leadership given Boris is going to be out of it for some time, even in the best case. (And naturally everyone wishes him a full and speedy recovery.) Yet there are also key global implications here.
Equity markets rallied again yesterday, partly on a short squeeze, but partly on hopes that we are indeed flattening our virus curves and we can all go back to normal soon. Crucially, however, this bullishness presupposes that we have a strategy for once the curve has been flattened – do we, post-Boris?
Clearly, COVID-19 is not just potentially deadly for the elderly and vulnerable, but even for the relatively young and fit -Boris cycles regularly, is in his 50s, and unless underlying health conditions are being suppressed by No 10, is NOT a classic potential victim at all. That should immediately dent and/or shatter confidence in what is yet again emerging as a potential economic exit from this tragedy – ‘herd immunity’.
This plan, doing the rounds in the press again, is that when we flatten the virus curve in developed countries all we need to do next is to then keep the vulnerable locked down and everyone else can go back to a semblance of normal life as they aren’t in danger. Simple! V-shaped! Risk on! Why not?! Well, for these reasons:
The problems with that approach are that this will involve millions of people staying under lockdown and socially distanced, even within families, between generations and the ‘vulnerable’ and ‘not vulnerable’ – how do we do that, practically?;
It assumes that immunity is something we can indeed develop, and which will have some duration – as opposed to that of the common cold, which is also a coronavirus, and for which that never really happens. Indeed, we have seen some reports of people catching it twice, so this is not total paranoia;
It depends on mass testing that only a few states seem to have in place at the moment (the UK has just admitted that their antibody tests, on which this strategy will rely, don’t work); and
It assumes that the ‘not vulnerable’ population can easily handle COVID-19 health-wise…..like Boris is?
So, yes, we are seeing some countries following the path of China--Austria in Europe, for example--and looking at opening up their economies again. However, this is not a binary process or one without huge health risks that could easily prompt renewed official or voluntary lockdowns. Of course, all the while the economic damage is still piling up; it is far easier to see unemployment soar from 4% to 20% under lockdown than it is to assume that it effortlessly goes back to 4% after lockdown is lifted. It is always easier to destroy than to create.
In short, short-squeezes might encourage risk on; but the virus situation arguably requires a far more sceptical stance. We likely face a long, hard road before things get back to where they were at the start of the year – if they ever can now the policy genies we have unleashed are out of the bottle.
Let’s also not forget one other uncomfortable truth: the exit strategy above also implies that only developed economies with rapid mass testing and the wealth and resources to socially distance will be able to get back to normality. Most emerging markets will not be able to do so, and so logically will have to be quarantined until they can. Hello bifurcated world economy; hello ongoing economic crisis in emerging markets that make up a huge share of the global economy.
Indeed, for those who read our note on the Eurodollar market and global, structural USD shortages yesterday at times of lack of confidence (The “You-Roll-Dollar” Market), note how the above fits just that bill. And note the IMF, now expecting a global downturn worse than in 2008-09 that will smash USD-earning exports of goods and services, are planning to offer short-term USD loans to countries that lack enough US Treasuries to participate in the Fed's new swap line scheme.
The US are OK with it – and why wouldn’t they be? It’s more USD debt in a world with far too much US debt, which will only cement the global structural dominance of USD even further; and it’s a further bailout for everyone who lent out USD while ignoring the obvious structural stresses and risks in said global system. Anyone not wanting the USD to play that role will be less amused. And how will those USD loans will ever be paid back again? Do try to ponder that as Argentina defaults on its locally-issued USD government bonds.
Meanwhile, the RBA held rates at 0.25% today and stated that they are happy with how the financial markets are now functioning and so will be stepping back on their immediate liquidity support, even if they will still do whatever it takes to keep 3-year yields pinned: cue a sharp rally in AUD and a rise in Aussie bond yields. Yet imagine what the local market will look like if/when the global economic picture deteriorates further, or for longer than just the expected slump in Q2, and if the RBA states that it has to throw in as many AUD as it takes: in that scenario it will be AUD down and bond yields too.