NEW YORK/MILAN/LONDON/HONG KONG (Reuters Breakingviews) – Corona Capital is a column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.
Italian Prime Minister Giuseppe Conte waves as he arrives at the upper house of parliament ahead of a confidence vote in Rome, Italy, January 19, 2021.
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– IMF
– Italy
IT GETS BETTER. The International Monetary Funds updated world economic forecasts released on Tuesday see global GDP jumping 5.5% this year 0.3 percentage points higher than in its October projections. Vaccine rollouts and more fiscal support underpin this rosier take.
True, the international lender has reasons to be wary given the pandemic is still raging, particularly in countries like the United States, Britain and Brazil. But news on Monday that the Moderna vaccine appears to work against more infectious Covid-19 variants should instill more confidence that governments will get the crisis under control.
And the newly emboldened Democrats may be able to pass a big chunk of U.S. President Joe Bidens proposed $1.9 trillion stimulus package. That will not only help struggling Americans, but also trading partners like Mexico. The IMF may sometimes be too quick to see the bright side, but in this case, a little optimism is warranted. (By Anna Szymanski)
ROMAN SHRUG. Investors appear oblivious to Italys latest political gyrations. Prime Minister Giuseppe Conte quit on Tuesday after failing to secure a solid majority in the countrys senate. Yet Milans blue-chip index was up more than 1% by lunchtime, while the yield gap between 10-year Italian government bonds and their German equivalent, a good indicator of financial tension, ticked down to 122 basis points.
Investors are betting Conte will re-emerge as the leader of an enlarged coalition of pro-European parties, or that a technocrat prime minister will take over. Failing that, snap elections would probably produce a victory for Matteo Salvini, the eurosceptic leader of the League. Yet even such a shift would not ruffle the highly indebted country while the European Central Bank continues to hoover up EU government bonds. Even with an election, the yield spread is unlikely to widen beyond 200 basis points, say Citi analysts. During the euro zone crisis in 2011 it widened to 550 basis points. Italian investors are still in the comfort zone. (By Lisa Jucca)
COOL YOUR JETS. Jet engine maker Rolls-Royce is feeling the strain or rather the new strains of the coronavirus, which have grounded air travel once again. The company makes around half its money when planes are in the air, because of the way its servicing contracts are structured. New travel restrictions mean Rolls will burn 2 billion pounds of cash this year, it said on Tuesday, compared with an average Refinitiv estimate of 1.3 billion pounds. Shares fell 9%.
It could still get worse. Rolls reckons flying hours in 2021 will be 55% of 2019s level, down from the 70% it expected previously. Although this is lower than the base-case scenario planned for when raising 2 billion pounds in a rights issue last year, it still implies a speedy recovery in the second half of 2021. With vaccination programmes only in their early stages, further turbulence is possible. (By Dasha Afanasieva)
NOT TOO PROUD TO BEG. Cathay Pacific, Hong Kongs beleaguered flagship carrier, is terrified its government may force it to quarantine flight crews for 14 days in a hotel each time they return home. The company warned that passenger capacity could be cut by around 60% and the cash burn rate could increase by up to HK$400 million ($51.6 million) per month, on top of the HK$1 billion to HK$1.5 billion it is already torching.
KLM recently won a similar face-off with the Dutch government by threatening to halt long-haul flights. Cathay has already made deep staffing cuts after a $5 billion rescue package was extended in June. Pushing it further to the operational brink could hurt the citys economic recovery, not to mention its own turnaround. Smaller international hubs generally benefit from having their own airlines they can ship vaccines, for starters. If Cathay gets permanently crippled, Hong Kong may regret it. (By Pete Sweeney)
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Breakingviews – Corona Capital: IMF forecasts, Italian politics – Reuters
