Market Overview

23 April 2020

Make Rescue Plans Great Again

More confidence returned to the markets as the US Senate passed another economic support package that adds to the existing program for small businesses by more than $400 billion. This sum also includes more money to hospitals, but at least $310 billion is going to payroll loan funds for small businesses that were shut down because of the quarantine measures.

The problem is that the initial $349 billion in the frame of the US Small Business Administration (SBA) strategic plan was exhausted in less than two weeks and mostly went to medium-sized chain companies, generating complaints that small independent restaurants and "mom and pop" businesses were left outside the SBA gate. This time the White House administration is paying more attention to this matter as the US Treasury Secretary Steven Mnuchin told the Fox Business Network on Wednesday that companies that received rescue money intended for small businesses could be investigated if it turns out that they don't really need the money. "Businesses need to look carefully at their applications to be sure they can certify that the forgivable loans of up to $10 million are necessary," he said. But there are already some public incidents with controversial consequences like when Harvard University decided to give back the $8.6 million it was allocated under aid programs after President Donald Trump questioned whether the elite school needed the money.

"Companies that apply and later decide they cannot certify their need for funds should pay back the money quickly," Mnuchin said. "There will be no liability to Treasury and the SBA. ... If they don't, then they could be subject to investigation," he added. On the same day Brian Benczkowski, the assistant attorney general of the US Justice Department's Criminal Division said in his interview: "The concern we have is that you are going to see all manner of potential fraud. There is a potential that there will be fraudulent or false statements on the loan applications to the banks. You might see non-existent businesses attempting to dummy up paperwork to see whether or not they can get that through the process at the bank and get access to a loan". Companies also may try to inflate payroll numbers, he added.

White House economic adviser Larry Kudlow remarked that community banks and a lot of smaller lenders will be included in the SBA plan as small businesses should not be held liable for infections of COVID-19, expecting "very significant demand" for relief loans. But other officials' concerns and ongoing political friction about the details of the package between the Democratic and Republican camps may delay the implementation of a not-so-large financial package, if compared, for example, with the trillion-

Dollar scale of the Federal Reserve's governmental bond "buyback", which does not directly help the economy at all. Larry Kudlow believes May will be a "transition month" to reopening of economy, but "hot spots like New York City and Chicago might take longer to reopen".

Meanwhile, more states in the US South and Midwest signalled their willingness on Wednesday to reopen their economies, but California's governor held firm to sweeping stay-at-home orders and business closures. Some Americans are still confined to their homes indefinitely, unable to work, while others began going out for the first time in weeks. "I wish I could prescribe a specific date to say that we can turn on that light switch and go back to normalcy," California Governor Gavin Newsom said in his daily remarks to the 40-million population of the state. As a pre-condition just to start lifting the quarantine, the governor said that health officials need to test for the virus up to 25,000 patients a day, while President Donald Trump confirmed 100,000 testing swabs next week and 250,000 the following week. "We have tried to make it crystal clear that there is no light switch and that there is no date in terms of our capacity to provide the kind of clarity that I know so many of you demand and deserve," Newsom concluded. The governor has pointed out that the most disappointing but not surprising news from the US Health officials in Santa Clara County, California that the virus "appeared to have circulated there in January, weeks earlier than thought, and early deaths were likely mistaken for the flu".

As a result, for now, we are seeing a moderately optimistic mood in the stock markets so far, as the S&P500 index is trading at 2.3% higher compared to Wednesday closing, and it has now recovered almost half of the losses suffered since the beginning of the week. The 2700-2720 area for the broad market index looks like a good support zone after a pullback from last Friday's peaks which were around 2900.

At the same time, much of the nearest movements will be determined by the reports of companies, some of which we discussed recently, including the Snapchat shares - which is a mobile messenger of Chinese origin - which soared up by 24% , some profit-taking on Netflix exciting revenue, and subscribers number and possible prospects for Amazon, which is going to come out with its Q1 2020 report a week later than expected, after the market close on April 30. Analysts at the Bank of America predict an increase of Amazon's revenue for the first quarter by 22% in annual terms or up to $73 billion, which corresponds to sales at the level of $10 thousand every second if the average sales is calculated for any 24 hours, writes The Guardian. This attracts a lot of attention to this internet delivery giant, which broke another historical record for capitalisation.

The smaller growth of European stock indexes is still something like the reflected light of the moon in the absence of the sun. The European Commission suggested it could borrow on the market under the guarantee of the future EU long-term budget using methods tested over the past years and lend it cheaply to governments. Once the proposal is presented, leaders of EU countries would discuss it again with a view to adopting it by June. So, the final decision may take quite a long time. Italy's Deputy Economy Minister Laura Castelli said on Thursday the country could not afford to wait until June for the approval of Europe's joint recovery financing.

This light is real, thanks to an improving infectious picture, but dim due to difficulties in approving common European funds for recovery. "Thinking of waiting until June means not being aware of the situation the country is in. We are forecasting one of the biggest debts in the history of the country, the virus will not wait," Castelli told Radio Capital in an interview.

The EUR/USD is moving to the lower levels today as traders reacted to the rumours that the European Central Bank (ECB) was revaluating the parameters on its Pandemic Emergency Purchase Program (PEPP) to allow purchases of "below investment grade securities." That means the ECB may follow the Federal Reserve and buy the so-called "junk" bonds to support the middle-sized companies. That could be good news for the economy of some European countries at least, but may be an alarming sign for some Euro asset holders from the point of the single European currency's stability, the emission of which may take a more blurred framework.


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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.

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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