Markets Have Moved Beyond Coronavirus; This Is What's Being Priced In Now

The rout in risk assets is no longer just about the coronavirus. Yes, we can highlight a dozen economic negatives directly from the virus but we have gone beyond that, or are close to that point. We are not efficient market proponents, but the market is certainly capable of looking out beyond a year or two, when we will recover from the virus.

The EU announced it's highly likely to be in recession, while the Empire State Manufacturing Index spoke the same words for the U.S.

Even in a worse-case scenario of about 4% global mortality, you could argue that several assets are underpriced. Yet, what's being priced in now are the second-order effects. There are increasing solvency risks in the energy sector and mass bailouts in aviation are already underway. The entire hospitality industry is under threat with countless small restaurants and businesses likely to be pushed over the edge.

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An early tell on how the government will proceed, is the structure of an airline bailout. The WSJ reports the White House is looking at $50
B for airlines in an expensive precedent. The report says one of the possibilities is cash grants, and that's a borderline-dangerous precedent. We estimate that by end of June, bailouts and federal government assistance will reach a total of about $500 bn or about 3% of U.S. GDP.

Markets today, yesterday, Thursday, Wednesday, month to date, Year to date.

While the market may initially cheer anything that safeguards shareholders, that may quickly prove to be shortsighted. Not only will it escalate costs and deficits but it raises the risk of social disruption. This is the time when the moral hazard from the 2008-09 bank bailouts looms large. Everyone wants, expects and demands a bailout now.

That's going to prove to be impossible. What the market is pricing in—at least partially—is social and political disruption. We have written often in the past year about the growing fractures in politics as many countries diverge from the center. This event is another spark that will light fuses around the world.

In FX, the yen continued to gain ground in the volatility as the classic safe havens rose. USD/CAD hit 1.40 for the first time since 2016 and remains far too low for a global recession.

We got a first taste of the scope of the U.S. slowdown yesterday, with the Empire Fed falling the most on record in a single month. It plunged to -21.5 from +12.9. That's merely the leading edge of the economic cliff of coronavirus. Another real-time data point to watch will be Tuesday's German ZEW survey. The consensus is a drop to -27.2 from +8.7.

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