Market Overview

It is with some concern that the spread of the virus is still on the left side of the bell curve and that it still has a long way to go. The peak is expected to be within four to eight weeks, and it is also expected that several measures will be imposed to contain the virus, whose spread is expected to continue for some time. Many central banks have already taken several expansionary measures and there is a promise of fiscal stimulus on the part of practically all governments, however that does not alter the state of panic in the financial markets and the losses observed in several equity markets are already close to 30%.

Last week, I was writing about how the Fed's interest rate cut by 50 basis points had brought the entire yield curve down. This did not only effect shorter-term yields, signaling precisely that a long period of low growth is just around the corner. It is interesting to see how this curve also responded to the new action by the American central bank last Sunday to reduce its key interest rate again to a range of 0%-0.25%. The whole curve fell again in all maturities, with yields decreasing more in the short term than in the long term, indicating that not only will low growth be prolonged, but also that the recession will be more severe than initially thought. In Portugal, on the other hand, it is possible to observe a decrease in the yields at 6 months and one year, but also at an increase over all other maturities - this has led to a steeper slope of the curve.

Implementations of these measures are necessary; however, they have also served as a confirmation that the current economic situation is a serious problem. Although it is favorable for companies to pay their loans at a lower interest rate, it is not guaranteed that the same will happen with those that have already issued bonds. In the United States, for example, the credit spread (difference between the yield paid on a government bond compared to a corporate bond of the same maturity) increased more in a day than over the last quarter of 2008. Furthermore, bonds a grade below investment level (also known as high-yield or junk bonds), had an increase of 176 basis points from last Thursday to last Friday. In addition to the lack of liquidity, there may also be a solvency problem.

The question here is whether it will be possible to regain investors' confidence. Policies for fiscal and monetary expansions tend to be called stimulus measures because of the impact they can have on increasing the marginal propensity to consume against the detriment from savings, thus leading to growth in consumer spending and business investment. However, with the population closed at home and with a brutal reduction in consumption, these measures seem to be more of survival and not necessarily of economic stimulus. It is possible to delay possible bankruptcies that may exist due to solvency problems or lack of liquidity, but there is always a limit regarding the effectiveness of these measures. However, when the population returns to its normal life, these actions will certainly provide a faster recovery and actually start to act as a stimulus to the real economy.

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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade. Indiscriminate reliance on illustrative or informational materials may lead to losses.