Policy makers come to the rescue of financial markets for now
Stock markets staged a brief but violent relief rally in the face of still elevated volatility levels, as politicians finally followed their central banks by putting in place fiscal measures to help alleviate the surging unemployment levels and dwindling corporate cashflows as lock-down policies go global. The worldwide fiscal policy response has been indeed decisive and commendable, especially as the scope of these bailouts have proved wide ranging to include helping smaller businesses and their employees. Moreover, one feels that the winds have shifted away from blindly throwing tax payers’ rescue funds at the multinational corporations as policy makers, especially those in the US will be increasingly under the microscope in deciding which firms get rescued and why.
Last week’s retracement of the dollar index also came as a major relief as central banks led by the US Federal Reserves have spared no measure at their disposal to ease dollar funding shortages. Thus, global currencies which were facing a meltdown scenario in the previous week regained some ground against the Greenback. The Japanese yen has seen the most fascinating swings given its traditional safe haven status as the currency had initially strengthened to its highest levels in four years against the dollar in early March when market panic had initially set in, only to retrench back to its recent lows when dollar funding shortages appeared and finally settling somewhere in between last week as the cross-currents whipsawed the unit in all directions.
However, the US financial plumbing issues remain a key concern as mortgage-backed bonds are still vulnerable to foreclosure risks without a more targeted policy measures to allow banks to forebear loan repayments during the lock-down period while corporate bonds face a huge wave credit downgrades by rating agencies that could force more sell-offs. Although banks look to be in much better health than the previous financial crisis when they were at the centre of the financial problems, clearly more economic policies are urgently needed to avoid further sell-off in financial assets. The good news is that policy makers seem to be fully aware of this fluid situation.
Back to facing the realities of the fast spreading Covid-19
With measures mostly in place to stave off an immediate short-term global depression, we feel the focus will shift away from economic policies and back to epicentre of the problem in how to effectively contain the global pandemic. Here, global policies have been nowhere as decisive. As we had feared only in two weekly publications ago, the US has surpassed China in number of those infected and has indeed become a global hot-spot with over 100,000 Covid-19 cases. Shortages of protective gear for nurses and doctors, not mention, ventilators which had looked more than apparent weeks ago is only now being addressed while President Trump after much hesitation has been finally forced to invoke the post-cold war federal law, the Defence Production Act, to force GM to ramp up production of ventilators.
How the US tackles its containment program will prove pivotal in stabilising global financial markets. With its fragmented private medical health care system, its weakness in how to respond to a national disaster has become more than apparent. We feel that growing talks of sending people back to work in April, are a blatant disregard to fast spreading contagion which we sincerely hope are eventually avoided as it will further overwhelm medical facilities and put the lives of medical workers at the front-line of this war against the virus at more risk.
The second wave of the global contagion is coming
With the second wave of infections coming from travellers returning back home to their respective countries, even China, South Korea, HK, Singapore and Taiwan which have best managed to contain the spread during the first wave are on high alert again, shutting their borders and encouraging continued social distancing. So although these countries had provided some hope that the measures like total lock-down, mass testing, contact tracing and high vigilance had brought good results, clearly things will not get back to normal for a long time to come.
Sadly, we now seem to be at a cusp of the virus ravaging through poorer nations in South America, the Middle East and Africa. This is especially true for war torn people living in places like Yemen, Sudan and Gaza, not to mentioned, those in overcrowded makeshift refugee camps, from Bangladesh to Turkey and Syria, all facing the abyss. Iran which is in the heart of this pandemic in the Middle East where the virus is spreading fast and reportedly killing thousands, looks to have become the first test-case of the herd immunisation theory, suggesting that once 60% of the population becomes infected, herd immunisation will kick in. Moreover, with median age of 30, Iran should better withstand this freely spreading pathogen than most nations with much older demographics.
With Japan Olympics abandoned we hope policy makers now focus on saving lives
This brings us to our own market coverage of Japan with one of the fastest ageing demographics base. We feel no other G7 government has been as complacent in its containment program as that in Japan. As we have argued ever since the threat of the virus came to Japan’s shores by the way of a cruise ship, Diamond Princess back in early February, the incompetence of its policy makers in mismanaging the containment measures needed have never failed to disappoint.
Prime Minister Abe and his cabinet have done almost everything in their power to keep the hopes of this year’s planned Olympic games alive by downplaying the spread in the country. Indeed as many optimists have underlined, Japan has the highest personal hygiene standards, no to mention, the least tactile nation given the country’s social norms. Many had also pointed to a low number of deaths in the official tally suggesting that the spread looks to have indeed been contained. However, for anyone who has closely followed the progression of the virus and how it has spread thus far, it has been clear these social norms will not be enough to contain the contagion there. We also highly suspect that the death-toll had not been properly reported until now.
With most businesses and entertainment facilities having been operating as normal until this weekend when officials have finally asked people, especially those in Tokyo and Kanegawa to stay home, we feel that a more prolonged Japan lock-down now looks inevitable. Having finally realised that even if Japan had no cases of infections, staging the summer Olympics had become impossible, we hope that the government will now focus its attention on saving lives by abandoning plans to reopen schools as Abe has been suggesting until even last week, finally declaring a national emergency and making the most efforts into testing its nation. With only 27,000 people tested thus far (close to tests South Korea conducts on a daily basis), clearly, there is a huge task ahead.