Federal Reserve comes to the rescue of the entire debt market
On Thursday of last week US central bank went above and beyond any relief measure anyone could have imagined even a month ago by announcing its latest $2.3trn pump in buying muni-bonds, debt issued by US states, cities and counties, not to mention, corporate junk bonds that have recently been downgraded to below investment grade. The bears were quick to cry foul, accusing the central bank of inflating yet another major bubble and totally losing its moral compass. The bulls, on the other hand, celebrated another heavy-handed central bank intervention which they deemed vital to save the economy from this ongoing human catastrophe.
The rule of thumb termed “don’t fight the fed”, even in a middle of a pandemic seems prevalent. This is especially as S&P has rallied by over 23% back to bull market territory, leaving non-believers and fund managers with high cash positions under increasing pressure to put more money to work. What to buy will prove far more tricky as the coming corporate earnings, both for Q1 and Q2 will prove mostly disastrous. However, participants are fully aware of this and seem willing to overlook the coming earnings season should the virus containment programs start to work.
US unemployment data key in gauging success of relief programs
With the US central bank also pushing its commercial lenders to extend the allowed risk free financing, all eyes should be on the US unemployment data as a useful forward indicator to gauge if the government relief programs are working and smaller businesses are starting to see the loans distributions they are designed for. Should surging unemployment levels start to stabilise, this will be seen as an additional positive that could encourage investors.
We feel any notable stock market correction that could prove the bears correct, that this bounce has been nothing but a ‘bear market rally’, seems unlikely in the short term as we simply cannot see much scope for negative surprises that could potentially frighten investors to raise more cash, especially as the financial plumbings look to be functioning again thanks to Fed’s aggressive actions. As long as Q2 earnings are continued to be viewed as the absolute bottom, any prospects of improvements from then on will be also seen as a positive and much of that depends on where we go with the virus infections over the next 4 weeks.
Back to Covid-19 as picture looks less rosy in the near term
Although a targeted vaccine is still some time away, more and more drugs are now in the pipeline that have shown promising efficacy in treating those infected. With number of US and European sufferers reaching a million, test case studies of much bigger groups which are receiving different treatments should start to emerge soon. These should provide more conclusive data about which treatments are more effective at different stages of the infection which could hopefully drastically reduce mortality rates.
For now, however, besides the poorer countries where as we have been previously highlighting, the virus is ravaging through their population in alarming rates, the news of the pandemic in the western front have also been less encouraging in the near term. The rate of infections in Europe which were showing signs of flattening in the previous weeks seem to have spiked up again and lockdown periods in Italy and Spain have been extended to late April.
Lockdowns to be extended while borders to remain shut in 2020
Indeed, judging by the period of the more stricter Wuhan lock-down, we think that the end of April deadlines will also prove too optimistic and it will not be until sometime in May when we will see much of Western Europe showing a flatter infection curve. This could leave the lock-down regimes in place until early summer but still within hopes that businesses will gradually restart operations sometime in Q3. In the US, we think this could come a little later in the quarter and in Japan which has only recently managed to build a consensus for a total lockdown, its recovery looks to come last among G7 nations.
However, it should be noted that that the virus is mutating and its mortality rate is starting to vary from region to region with some epidemiologists suggesting that the strain in the US and Europe is proving more fatal than the earlier versions detected in China. With latest studies from China suggesting that over 30% of younger population that have recovered remain vulnerable to reinfections while other more disturbing findings from Korea pointing to possible reactivation of the virus among those recovered, there are still plenty of factors regarding this contagion to remain concerned about. Come what may, we think it is safe to assume country borders will remain mostly shut for 2020 in fear of importing different strains of Covid-19 which could prove more deadly than others.