Investors Eye US Unemployment Claims as the Extent of Covid-19 Shock Has Not Been Grasped Yet

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The US Dollar moved down on Thursday against majors, fueling demand for EM assets and partially reversing cash overweight in portfolios of market participants, which has been forming during the heightening of the epidemic. Senate has approved controversial bill on $ 2 trillion fiscal aid to the economy. Its good part will consist in plain distribution of money to the low-income population and the middle class ($ 1,200 per adult and $ 500 per child). The biggest corporate winners of the bill are leisure, tourism, airlines and other industries damaged by the epidemic which will be offered bailout loans, but at the same time will be banned from rewarding investors through dividends and buybacks for the term of a loan + 1 year. This give us a clue about the direct stock market support from the bill (which is likely to be marginal).

Interestingly enough, the bill does not provide assistance to distressed oil industry. Recall that earlier Trump wanted to allocate $ 3 billion to fill strategic reserves, the initiative could provide daily demand for about 440K barrels for six months. But the bill apparently won’t bring relief directly to the sector.

Currency and US markets are bracing for unemployment claims figures for the week ending March 21, which should give us the first impression of the depth of economic shock and assess the adequacy of state’s fiscal support. The consensus forecast is 1.5 million claims, which is about 6 times higher than the recent all-time low (<300K). Projections run as high as 4 million claims. White House chief economist Larry Kudlow tried to smooth out a possible negative surprise stating that the official report would indicate a strong surge in the number of applications, but did not give specifics. The reading falling below consensus will likely spur risk appetite in the short-term extending market respite. However, this is unlikely, since in California alone, according to California Governor Newsom, more than one million people applied for benefits. The situation in New York, the epicenter of the US epidemic, is probably no less serious.

US inflation expectations are developing the rebound against the backdrop of expectations of a sharp increase in money supply, largely due to direct government intervention in the form of a fiscal package:

In this regard, gold, as one of the assets serving as a protection against inflation, continues to look undervalued despite recent surge and subsequent pullback. The completion of the pullback around the $ 1600 mark may indicate consolidation before resuming advance.

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