Italy: Nation-Wide Covid19 Lockdown

(Tue, 10 Mar 2020). 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. 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. 

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.




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