Thursday, November 12, 2020

Record hospitalisations brings Covid-19 concerns back to light; lockdown restrictions in the US likely a matter of when not if

  • Dollar
  • Yen


Analysts’ Pick: Record hospitalisations brings Covid-19 concerns back to light; lockdown restrictions in the US likely a matter of when not if

  • New York’s new restriction on bars and restaurants keeps investors concerned, but the bulk of downside risk for financial assets are more probable in the US’ other top five most populous states
  • Texas, California, Pennsylvania, Florida all have positive testing rates ranging from 4.2% to 10%
  • Hospital occupancy rates more likely to pressure state governments into imposing some form of mobility restriction
  • Short-term upside for safer sectors and financial assets more likely as a result
  • Jobless claims to become more important moving forward as pandemic concerns put pressure on business hiring
  • Dollar yen likely to face some downside pressure as a result, with demand for the yen likely to occur as investors and traders increase their hedges to take on greater risk for medium-to-long-term upside in riskier assets


As the bulk of volatility resulting from the US presidential elections has mostly subsided, financial market participants are likely to shift focus back on fundamentals that are expected to drive stock prices in the medium-term. In particular, Covid-19 concerns including hospitalisations in the US and vaccine developments from Pfizer has resurfaced. Investors today will be looking at what the damage has been in terms of job creation for the US when jobless claims data is released later. Employment data will become increasingly more important in the weeks and months ahead as Covid-19 cases surge and as the US faces greater risk of lockdowns. New York has become an example, with Governor Andrew Cuomo announcing that bars and restaurants with state liquor licenses as well as gyms will be required to shut by 10pm New York time. Additionally, in our view, investors are more likely to be less sensitive to vaccine developments at this point of time since the potential downside risk in the short-term due to the pandemic may be increasingly growing as compared to the upside from a vaccine due to multiple concerns regarding manufacturing, distribution and take up rates.

Volatility has dipped well below the 30-day average in both the VIX and VXN indices, signalling that most of the volatility from the US presidential elections has eased


If we look specifically at New York, the pace of Covid-19 cases is starting to climb exponentially. While some may argue that increased testing does have a positive correlation to the rate of daily Covid-19 cases, the focus should be more towards positive testing rates and eventual hospitalisations across states. Most notably, the last time our report looked at Covid-19 cases in the US, an uptick was more concentrated in the midwestern area of the US. One scenario that we suspected could play out was the eventual spread to other states, due to the low stringency of federal government intervention in the country, i.e. each state in the US had varying mobility restrictions and thus was more likely to experience a quicker spill over of Covid-19 cases across states.

Cases in the various US states continue to show signs of early or ongoing increases in daily Covid-19 cases


In fact, New York should be the least concerning of all the US states as its rate of testing remains higher than the group. Comparing positive test rates to the other top five most populous states in the US, New York also remains the lowest. Hence in our view, it is a matter of time before we see increasingly more mobility restrictions being implemented by state governments to help alleviate the pressure off of the health care system. However, while this should drive safety assets in the market in the short-term, the longer-term prospects for stocks resulting from positive vaccine developments suggests that upside for safe haven assets is likely to be somewhat limited as well.

State % Positive
New York 2.20%
California 4.20%
Florida 7.50%
Texas 10.00%
Pennsylvania 17.00%
*Source: The Covid Project

As for jobless claims, investors will be keeping a look out for a deceleration in hiring due to the growing risk of lockdown restrictions. Initial jobless claims in this case is unlikely to be strongly impacted since it is more closely correlated to layoffs than hiring, and instead will probably continue to decline week-on-week at a slowing pace which is in line with expectations. Continuing claims is likely to continue to be distorted by Americans reaching the 26-week limit that many states imposed. An aggregate of all the various benefits programs is likely to be more useful, but will also lag by an extra week due to the nature of the reports. While the aggregate of all continuing claims has shown to be continuing to decline, we may start to see an additional slowdown to that decline in the weeks ahead due to the ongoing concerns regarding Covid-19 restrictions forcing businesses to hold off on hiring. This would implicitly mean greater strain on the labour market while the number of unemployed Americans continue to hover near record levels.

Aggregating all continuing claims across all programs shows net claims still above 20 million


Hence our forecast for the dollar yen is additional downside in the short-term possibly towards 104.21's level as markets return to the Japanese yen for safety against the rising Covid-19 cases, and the ongoing political risk that the US faces. In the medium-term, we expect to see the dollar yen to continue its overall downward trend as well, since we anticipate some weakness in the greenback moving forward due to expected stimulus measures and easing of political uncertainty post-January 2021.

Technical Analysis:


The dollar yen found some support as positive developments regarding a Covid-19 vaccine and a potential Joe Biden presidency helped alleviate the upward pressure on the currency pair. That being said, the longer-term trend in the currency pair continues to favour a downward cycle and in our view is likely to do so due to fundamentals. In the short-term, technicals favour a contrarian strategy as well as RSI looks to be approaching its limit, while MACD is showing some signs of a reversal from its highs. We expect USD/JPY to retest the support level at 104.21 as a result, and possibly break that level if several downside risks do materialise, including a hard-Brexit, and increased lockdown restrictions in the US.

Support: 104.21 / 103.19 / 102.03

Resistance: 105.66 / 106.32 / 106.93

USD/JPY Chart (H4)