Market Overview

26 March 2020

The Unbearable Lightness of the Markets Going to Hell and Back

An adventure is always unexpected. Sometimes I entertain the notion that I am like a wizard with staff that travelled the half-length and half-breadth of the world and who has seen more than enough fireworks that one could hardly imagine.

But to be honest, even when I manage to make quite reasonable conclusions, from time to time, during the kaleidoscopic changes scratching through the signs of the vigorous asset prices ups and downs, the uncertainties still buzz. An endless minefield with plenty of mistakes to be made by all of us, not excluding myself. Disappointing, isn't it?

However, an adventure with everyone on board, is something that we have not gone through for decades. Someone can go a whole lifetime without enduring this adventure.

Sometimes, it is better to gaze outside the jigsaw puzzle to get the whole picture and the right angle on the true modus operandi and market drivers which are steering the pandemic sentiment.

There has been, what seems to be just a fugitive moment when most central banks and governments acted united to do their best to prevent the world economy from stalling into the abyss of global recession by dumping their own framework of financial existence. Helicopter money, like a blueprint of the deemed income, erected markets while the unthinkable $2-trillion 'mother-of-all-stimulus' bill has been passed by the US senators and the House for approval on Friday. The G20 countries are likely to pump even more money to tackle the virus pandemic shock today, while most of the West world government bonds, even the US short term T Bills, slid to a negative zone and Initial Jobless Claims in the US are expected to hit an all-time record by at least one million.

Following the social distancing call, most people voluntarily or forcedly spend most of their time at home. With dizzy news of the coronavirus marching across the world, many of us partially feel disordered or even mad. The physical proximity to the one we love or even those in solitude, enables less mechanical yet more thoughtful actions and it also sometimes even allows for more philosophical approaches to analysing the relationships within the economy and the markets.

Zeroing of the central banks interest rates and all the government bailout packages, official quarantine limitations or public discussions on the possibility and timing of its gradual removal to reopen the economy, all these things are being perceived now in the context of influencing the business of friends or jobs of acquaintances who are within our nearest circle. All market participants are first and foremost just human beings who are emotionally involved in the threats, they are not machines following manuals or ABC books on economy. That's why the attitude of the people was so reluctant to the first old-fashioned monetarist and "non-human" moves made by the Federal Reserve (Fed) and all other central banks when they originally tried to solve the financial system's problems and banks' potential problems, but not the people.

The routine financial medicine deemed to cure some other disease. The fireworks of liquidity and the urgency to make decisions may be considered as the prelude to the uncontrolled wildfires in the global financial system. So at some point almost everybody just started panicking and selling off all available assets they had at hand. People may have not considered such crazy and alarming measures to be the cure to the real threat of the pandemic when they stopped visiting public places, shops and restaurants, and stopped taking their children to lessons, etc. As a result, production was put on pause in many plants and factories, many businesses are on the verge of bankruptcy as they are failing to repay their credits and pay rent.

Accordingly, the measures taken by the European central bank first, and by the Fed and others later, when they began to buy assets of specific companies - not just Treasury bonds or the mortgage-backed securities - this exited a much livelier response and at least suspended the markets' sharp fall. With the new stimulus provided by the monetary policymakers and government, the dynamics of corporate bonds may be monitored closely. An observation can also be made as to which investors usually begin to invest in crisis periods earlier than in shares of the same companies as bond coupon income is usually a guarantee of money as soon as the company exists and is considered to be safe. Central banks directly encourage ordinary buyers to invest in these same instruments by declaring unlimited purchases of corporate bonds. This may sound like a wakeup call for many potential investors that are afraid to buy company bonds even at a five % yield and are more willing to invest in the US Dollar or in the Euro amid doubts that the company may survive in the coming months of ultra-low consumer activity. Most companies in both the US and in Europe are desperate to scrape out the entire available loans under zero percent conditions.

The growth of consumer activity is the main economic target of the direct distribution of "helicopter money" from governments to households in addition to the support of people in difficult times. Therefore, such measures, like $1,200 to each adult and $500 to every child in the United States, or the wipe out of communal and rent payments in France, were accepted by the markets much more favourably than "just one more" trillion of quantitative easing (QE) program or than the liquidity injection to the banks.

The possibility of a faster opening of the economy and at least a partial early lifting of the quarantine is being widely discussed in the United States and in Europe. The most badly damaged European countries, such as, Italy and Germany, however, have not provided a specific time frame for such reopening, but US President Donald Trump has already said that he wants the country to be back to business by Easter, April 12, despite health officials' warnings. The President's messages were announced as more governors impose a strict stay-at-home quarantine. By the way, the very word "quarantine" comes from the Italian "quaranta giorni" that just means "forty days", because during a forty-day period merchants' ships were kept in harbours in Venice during the Middle Ages after arriving from the plague areas. The timing of the quarantine was critical both then and now since you do not have to be an economist in order to understand that the shorter the period of inactivity the less the particular companies will lose.

For the same reasons, in the nearest future, the general market sentiment will be primarily focused on specific news from the companies and from the various sectors of the economy, rather than abstract macroeconomic statistics, such as, the Purchasing Managers' Indexes (PMI) or Gross Domestic Data (GDP) in different countries. Instead, it would be much more interesting for private investors to find out when the current terrible situation with a reduction by 85% or even 90% in the load of airline seats will improve, and whether the plans of Apple Co of reopening its stores in the first half of April will come true, or any other potentially good news for the service sector. According to Bloomberg, it was the service sector of the world economy that contributed more than 80% to the pace of global growth while the total contribution of industrial production was almost zero in 2019. Therefore, it is to the possibility of restoring service enterprises that everyone's attention is focused.

The economic map of the world around us now looks unusual and a little strange and may be compared to the dark tunnels of Moria - as described in the literature by J.R. R. Tolkien - the world has to pass through its way to recover the gift of a new life. The human factor of perceiving a different value of money than it was before is vital as money is no longer functioning in terms of providing them with GDP figures or with other material resources, this is no longer available in the conditions of pumping money injections for trillions of Dollars and Euros, but money as a tool that the particular company, the economy and the financial system still need to be able to use.

A comparative analysis of the situation in China or South Korea where economic activity is already waking up, and what scenarios will be followed by countries where the infection is much stronger now, the psychological attitude of the people around, everything will be part of the whole puzzle. The understanding of the business models that would easier survive the shock, what might be superfluous and may stay on the roadside, the timing of quarantines and many other "small" details, perhaps, will determine the attitude of investors. This may foster retail investors to reassess the risks and resume portfolio investments as the situation finally begins to change for the better and become clearer at some points.


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Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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