• Matheus Zani

🌎 The €750 billion package | Diplomatic war between US-China | African Covid-19 outbreak

Updated: Aug 12


July 24th, 2020


Happy Friday!


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EUR USD

Eurozone adopts a €750 Bn stimulus plan



After five days of intense squabbling, the EU made a huge statement on Tuesday with an unprecedented stimulus package. The package saw all 27 countries come together and agree to help the most ravaged countries in the EU bloc by selling blocks of bonds collectively with the vast majority of the proceeds going to the most in need and as grants not loans that need to be repaid.


How they got there was not an easy ride, each of the country leaders jockeyed for position to fill the void left by the Brits. Conversations started Friday and rolled right through the weekend to Tuesday morning. The new self appointed “Frugal 4” leader, Dutch PM Mark “Mr No” Rutte, (not sure which country gave him the nickname) dug in his heels on multiple occasions "We're not here so we can go to each others' birthdays for the rest of our lives -- we're all here to defend the interests of our own countries,". Then Mr No you don’t get any birthday cake or a goodie bag. Captain Penny Pincher was able to increase the loans portion of the stimulus from €250bn to €360bn.


Outside of the stimulus package they also earmarked €1.1TN to finance the more infrastructure projects and agriculture along with hundreds of other programs. Their ultimate goal being to drag the EU away from the worst recession they’ve seen since World War 2.


In spite of the fact that the recovery package is unprecedented, it is also a compromise. Netherlands, Austria, Denmark, Finland, France, Germany among others member states were not arguing with each other in order to reach the final amount or the scale of EU borrowing, but they were haggling over how the money should be spent. The self-declared Frugal Four of Austria, Denmark, Sweden and the Netherlands secured a mechanism that will allow the 27 members to delay any cash disbursements to member states that are slow to introduce any economic reforms, in other words, this mechanism gives the Netherlands (or any other country) the possibility to trigger a “stop-loss” on payments if it thinks a government has not fulfilled his duties.


Not surprisingly, during the heated debates, Italy and Spain rejected any loans that attached conditionality on how the money should be used. Not surprisingly again, both southern EU countries made sure there were no idea on what their economic reforms should look like. So, it looks like the stop loss can be triggered in the direction of mediterranean sea.


|FX

This pair exhibits relatively low volatility, and hedging costs that are a little high for the risk avoided, at about 1% (favoring selling EUR). The euro rose to its highest level since October 2018 against the dollar as the market absorbed the impact of the agreement on the EU recovery plan.



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USD CNY


US closes Wuhan’s sister consulate in Houston - China not happy



The US abruptly chose to close down the Chinese consulate in Houston. The reasons for the close have yet to be confirmed but it seems to be focused around security of information (or lack of). Rumors have been flying around burning documents in barrels and other “malign activities”.


Only a few days have passed since China announced its retaliation, and the US woke up this Friday with an order to close its consulate in the southwestern city of Chengdu. What lay behind this closure order apart from retaliation?


The US consulate in Chengdu has more than 200 staff and it is seen as strategically important because it allows the US government to gather information on the autonomous region of Tibet. In addition, this chinese city is seen by the US as providing opportunities for exports of agricultural goods, cars and machinery.



The tit-for-tat provocations come amid a sizable escalation in tensions between Washington and Pequin. US-China relations have deteriorated sharply this year on account of various issues, from foreign trade and technology to the coronavirus, territorial claims and drastic measures against Hong Kong.


With China and US relations at an all time low let’s remind ourselves how we got here.


On one hand, speaking in a provocative tone at the Nixon Library on Thursday, US Secretary of State Mike Pompeo said the free nations must induce China to change because the Chinese Communist Party’s policies and actions threaten the freedom and prosperity of the people of those freedom-loving nations.


On the other hand, Hua Chunying, spokeswoman for the Chinese foreign ministry, replied Pompeo’s comments on Twitter writing "It's about time that all peace-loving people in the world stepped forward to prevent him from doing the world more harm.


As President Trump has made clear, relations between the two economic superpowers will continue to deteriorate if China does not “improve” its behaviour. Therefore, speculation about a possible hot war is high.


|FX

CNY is a low volatility currency, as it is still not fully unpegged.

Hedging costs are impractically high by comparison, and hedging is problematic, given that offshore yuan, CNH, must be used. USD took a hit across the board as Jobless claims came out higher than expected.

USD ZAR NGN


Africa’s lack of testing is masking their numbers



The WHO’s Head of Emergencies Michael Ryan “is extremely concerned right now” about Africa’s grasp on the virus. Back in March, South Africa and the surrounding countries were operating under some of the strictest lockdowns procedures globally. However the ban’s were lifted early May and this, coupled with a large spike in cases and deaths, has generated a cause for concern. So what are the numbers and how does it compare to the other regions?



So what do the numbers look like?


The issue is we don’t know. The death rates in certain countries are way above the global average of 4.4%. (Chad 8.5% Sudan 6.3% Liberia 6.3% Burkina Faso 5.1%). However currently 80% of the testing on the continent is carried out by 10 countries. Out of these countries South Africa has carried out the most tests by far at 36 per 1000 people way below the UK 106 and the US 122. Nigeria however has only tested 0.9 of every 1000 people. The percentage of known Covid19 deaths to these countries are actually relatively low, some attribute this to the young population (60% of the population is under 25). This goes some way to prove the theory that the more testing you do the more cases you get.


What does it mean to the economy?


It’s not looking good. The UNECA (United Nations of Economic Commission for Africa, revised the continents growth prospects for 2020 down from 3.2% to 1.8%. The fragile economy is heavily reliant on agriculture exports and tourism and the trade imbalance is set to increase as investors pile into the traditional safe havens, decimating the value of the currency.


Another major issue is the lack of infrastructure to deploy the stimulus packages. Unfortunately there will be no hope of a recovery without a sound fiscal policy, no matter how big the stimulus and bailout packages are.


|FX

The Rand is one of the more volatile EM currencies, which is saying a lot: 15%/annum, which makes for a VaR of over 23%. Unfortunately, hedging costs are fairly stiff at almost 4% (favoring selling USD). However, the South African Reserve Bank (Sarb) has announced the latest decision on interest rates for the country, where it decided to cut the repo rate by 25 basis points, taking it to 3.50% per annum, with effect from 24 July 2020.



NGN exhibits enormous volatility, 22%/yr, translating to an unbelievable 36% annual 90% VaR. There are no NDFs available for NGN, thus the “zero” hedging costs. It’s unhedgeable.




In Other News


Currency Heat Map

This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.




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Quiz of the week


Answers


$1.586 billion (Powerball)

Won Jan. 13, 2016. Winning tickets were sold in California, Florida and Tennessee, making the annuitized amount for each winning ticket nearly $528.8 million.


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