Lockdowns,secondwaveandGeraldFord

French President Emmanuel Macron spoke to the people of his country yesterday through a televised address. He apprised them of the new lockdown measures which the government is imposing to fight the recent surge of new virus cases. Of everything he spoke about, there were two statements which the reader should take note of. First  that the “second wave of the virus is likely to be deadlier than the first” and the second statement was that “The virus is circulating at a speed that not even the most pessimistic forecasts had anticipated”. Apart from France the industrial powerhouse of Europe i.e. Germany is also witnessing a second outbreak of cases and imposed a month long lockdown. We need to “act now” exhorted Angel Merkel.

The alarming words from the EU leaders have not helped the cause of the world’s risk sentiment with stock markets witnessing a sell-off in both the EU and US. The German DAX index saw a 4.2% drop whereas the S&P 500 saw a 3.5% drop. Though in the morning trade today, S&P futures rebounded by 1%. But still the dominant underlying feeling is of risk off which will see the race towards safe haven avenues. Rise of dollar, Yen and US treasuries are the natural outcome of such sentiment and stocks and EM assets are expected to be caught on the wrong side.

Now coming back to Macron’s statement or shall we say predictions. The dire predictions serve one primary purpose and that is to alert the public, moving them out of their stupor. Also the pre-emptive acts like closure and curfews have to be initiated early and can’t wait for full scientific analyses to be available. The decision maker in such a case is often in a dilemma, he or she runs the risk of acting too quickly and causing collateral economic damage or acting too late and risking the health of the entire nation. The choice is not easy.

Nate Silver in his book The Signal and the Noise recounts one case from 1976 about a virus scare in the US. A small number of cases of H1N1 type virus appeared in a US military base and the authorities suspected that it would go viral very quickly in the general public. Given the deadly nature, the option to wait and watch was a tricky one. In a predicament (of costs and benefits) then US President Gerald Ford ordered a costly mass immunization program spending millions of dollars. The virus threat though didn’t materialized as expected. With the benefit of hindsight the rivals chided the president for unnecessary fear mongering. Ford lost the elections in 1977. Silver’s anecdote provides our reader a context to see how any decision is fraught with uncertainty and how hindsight is always 20/20.

Coming back to the data round up. We will have the US Q3 GDP numbers today where it is expected to show a 37% YOY rise. Last quarter was a 32% YOY contraction. Just a small point on calculation methodology, in the US they compute the QOQ change and multiply it by 4 to get the YOY number. The numbers are expected to have implication in the current poll battle as the narrative can be spun on either side. In Europe we will have the ECB monetary policy announcement today. The fresh surge and dwindling hopes of a V shaped recovery will be in focus.

Domestically, the 10 year benchmark bond closed at 5.85 yesterday. Today we will see the auctions of both OMO and weekly bond sales with Indian markets being closed tomorrow on account of holiday. Rupee is expected to open beyond 74 today.