Global Weekly: Bull market in quarantine

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As pessimism mounted significantly, governments and central banks supported financial markets by announcing scores of measures. Data indicates that chances of a severe shock with stretched longer-term effects on the global economy have increased.

Chinese retail figures showed the harsh impact of the corona crisis, with a decline over 20% last month. Leading indicators in Western countries also reflected pessimism among producers. On the other hand, Chinese authorities announced that Thursday for the first day since the corona outbreak, there have been no new local virus infections in the Hubei region.

In the meantime, all major central banks moved into higher gear with stimulus programmes. The US Federal Reserve (Fed) intervened for the second time with an emergency rate cut, lowering the reference interest rate to 0-25 bp. The Fed also announced the purchase of USD 700 billion in debt instruments (US Treasuries and mortgage-backed securities). Even the possibility of handing out ‘helicopter money’ is on the table. The European Central Bank (ECB) also intends to provide liquidity by buying additional bonds for EUR 750 billion. On a company level, several important enterprises decided to suspend share buybacks, cut dividends and draw down loan facilities in order to reinforce the balance sheet.

On a sector level, health care, communication services and consumer staples outperformed, whereas energy, industrials, materials and financials declined the most. In US markets, IT stocks also dropped less than market averages. In Europe, the strong decline of real-estate stocks in the past few days attracted attention. Investors fled from real-estate stocks fearing huge revenue and rental-income declines, due to lockdowns and the closing of retailers.

Due to high volatility and major sell-offs, the record-long bull market that started in 2009 after the great recession, is clearly over. With the global outbreak of the coronavirus, stocks have entered a ‘bear’ market. Indices dropped by more than 20% from their recent (all-time) highs. The bull market existed for 11 years. Main reasons that it could continue for that long included the loose monetary policy of central banks, (Trump’s) tax benefits, share buybacks and an acceleration in technological development. But a new bull market will eventually start again. So, the bull market was not killed by corona, but it is momentarily in quarantine.

Bonds: Support from central banks

The coronavirus outbreak continues to trigger more countries and regions into lockdown status. A lock-down, which is a radical approach, means a standstill of economic activities. In financial markets, we have seen risk aversion and heightened volatility, which has led to deteriorating liquidity conditions.

While it was a credit shock that led to an economic shock in 2008. We are now starting with an economic shock that has the potential to become a global credit shock. As a consequence, central banks have immediately restarted programmes from 2008, showing determination to support the financial system with their monetary policy tool kit. Central banks must act to keep financial markets functioning. In addition, governments are providing broad fiscal support programmes, which is unique in itself and appears almost coordinated. These combined support mechanisms should provide a strong safety net.

The European Central Bank (ECB), after its last emergency meeting, said that it will keep to its “whatever it takes” commitment. This phrase was formerly missing, and, as a consequence, the market had begun to doubt the ECB’s commitment.

It seems that everything is in place to support financial markets. Now we need to have a significant improvement regarding the spread of the coronavirus. That would enable governments to roll-back certain measures so that some economic activities could restart or improve. Before this occurs, we will likely see an increase in the number of downgrades of corporates and an increase in defaults, which had been at an all-time low. The magnitude, however, will likely not be significant, given the many measures that have been taken and the potential for governments and banks to modify their policies. Liquidity is also becoming a concern in financial markets. Selling can therefore be difficult. We currently suggest being patient and not trying to institute trades in a market with limited liquidity.