The world’s ninth-largest country is poised to slow to a standstill after another jump in cases led to a mass lockdown and a red flag in the bond market. The yen was the top performer Monday while the Canadian dollar lagged. US stocks suffered their worst day since 2008 and oil its worst day since 1991.
If Italy is a preview of what’s to come for the rest of the developed world then the situation is dire. The country restricted movement throughout the country, closed all schools until April 3 and banned public gatherings. Travel is still allowed for work.
The government is preparing to raise its deficit target to 2.8% of GDP from 2.2% but that’s a fantasy. GDP will be in freefall in March and until the virus is contained and tax revenues will plunge. While bond yields globally were cratering on Monday, Italian yields rose 35 basis points. The ultimate level of 1.42% is still ultra-low but it’s a warning that the market won’t tolerate rising Italian debt. Greek bonds also slumped.
So what’s next? The most-likely scenario is an endless stream of negative coronavirus headlines for at least a month. Any subsquent central bank cut will be met with news like today’s from Italy announcing 1800 new cases and nearly 100 new deaths. In all likelihood, the numbers will be much higher.
The second-order economic effects are just beginning and those include lower estimates, lower guidance, banking problems and debt downgrades. Mix in the potential for political and social unrest and it’s not tough to see why market participants are already dumping risk assets.
As for oil, there is no way to draw a line under crude with production exceeding demand and storage levels high. We’ve warned about this for a month. The loonie slumped Monday but what’s surprising is how long it has held up. A series of domestic missteps put Canada on the doorstep of recession before coronavirus and the knock-on effects from crude and a global recession will be dramatic. Even at 1.3700, the loonie is asleep to the risks.
