Reopeningofeconomies,newnormalandbonddefault

After a long weekend it is an opportune time to detail the over-arching theme which the virus has thrown at us. The theme primarily consists of three threads which we will describe below.

The first thread is about the easing of lockdown measures. Psychologists describe that any crisis response in humans follows three stages: Emergency, Regression and Recovery. The first phase of emergency response in terms of strict lockdown is now transitioning into the second stage of regression characterised by lowered guard. The economies across the world are easing restrictions but it has more to do with the fatigue induced by the lockdown than being able to find a possible cure. The cure still remains in the realm of conjectures as claims and counter claims on the vaccine efficacy become a daily affair. The continued state of heightened response is no longer feasible. News from Japan about lifting of the state of emergency, or from Spain that the country is ready to welcome tourists in a month’s time, or from India as the country restarts flights and public transport, is part of the transition to the new normal.

The second thread is the monetary and fiscal response. The central banks continue to ease lending rates in the hopes of kick starting the economies. In places where the natural bound of ZIRP has been reached, there are NIRP discussions that take over. For example, the US Fed vehemently denies that they are thinking about taking the rates below zero but the fed funds futures markets thinks otherwise. Last week we saw the rate cuts being announced in countries like India and South Africa. On the other hand government authorities across the world are busy devising stimulus and relief packages. The primary debates on how those packages will be funded continue.

That brings us to the third thread that is about the economic impact on the ground. The impact has been disproportionate but unsparing. It is unsparing as it has impacted everyone but disproportionate to individuals, corporate and countries which were already on a sticky wicket prior to the pandemic. On Friday the news that Argentina is looking to postpone the interest payment on the debt (technically a default) which it owes to foreigners made headlines. The creditors are in touch with the Argentinian government and are discussing new terms of payments but agreement is still elusive. The basic dictum will always be true - if you owe debt in a currency which you can’t print it is a sign of trouble.

In an interesting digression, few days back we had written about the history of South American conquest by Spain and how the silver mining changed the fortunes of Europe. Argentine is the Latin name for silver (the symbol for silver on the periodic table is Ag). The name Argentina denotes the land of silver (argentine). It is ironic that the land of silver is stating a debt default.

The Indian rupee is trading at 75.70 after opening at 75.84 levels. The 10 year benchmark bond trades at 5.99 currently. The US 10 year yield trade is at 0.68. Gold trades at 1731 $/Oz. The lowest gold has seen during the crisis was 1500$/oz in March. Asian stock markets are up as Hang Seng, Kospi and Indian Nifty show gains on Tuesday opening. Whether this is hope trade or regression trade only time will tell.