Marketmoves,GaussiancurveandMerkel'sadvice

After a 4.9% rise on Tuesday 10 March 2020, the Dow Jones did a volte-face diving down by 5.86% the next day. Given that the long-term standard deviation for the Dow Jones is close to 1.2% (ie. sigma is 1.2%), a 4.9% rise is a 4 sigma event and 5.8% is a 5 sigma event. As per the Gaussian distribution (also called the normal distribution), a 4.5 sigma event is expected to happen only once in 400 years. To set the context, a 5 sigma event is expected to happen only once in 4 700 years. As the major risk metrics in the world still use the Gaussian distribution as the mathematical base, it is not difficult to see that the comfort derived from such probability computations would be contrived at minimum.

As history is being created on a daily basis, the WHO now declared Covid-19 as a pandemic. Italy remains in lockdown. The US closed its borders to continental Europe and other countries, including India who levied restrictions on cross-border movement. A while ago we had written that the US physicist and adviser to CDC, Yaneer Bar Yam, had lobbied for paranoid measures to curb the spread of the outbreak. It looks like the US administration is finally heeding the advice which Yaneer gave in his January paper.

One of the most interesting insights of the paper was that any phenomenon which has exponential growth properties will appear very benign in the beginning as the numbers are low. But as exponentiality sets in, the impact hits with dramatic impact. The recent statement by the German Chancellor that ultimately 70% of the German population will be infected by the virus presents a grim picture of the future. Germany currently has 1 300 cases of Covid-19 and the total German population is 82.8 million – 70% of 82.8 million is 58 million just to give the context to numbers.

The US 10-year yields are trading at 0.77., Gold at 1636 $/oz, Brent crude at 34$/bbl, the Japanese Yen at 103.5. The Pound sterling weakened on 11 March 2020 as the BOE decided to cut the policy rate by 50 bps to 0.25% in an emergency move. The bank also promised action on directly supporting the firms in trouble through a liquidity line.

The Indian Rupee currently trades at 74.11 with the benchmark 10-year bond yield trading at 6.12%. We will have the CPI data soon which is most likely become a casualty due to the growing concerns around the virus news. The Rupee is expected to get impacted by the outflows of foreign investors on one side and the wherewithal of central bank support on the other side.