March 18, 2020

Fiscal Policy Opens War Coffins

Fiscal Policy Opens War Coffins

European futures are trading sharply lower even though fiscal policies have opened war coffins in order to soften the blow of the COVID-19 pandemic. In simple terms, the turbulent time continues for equity markets around the globe. Over the past couple of days, the S&P500 futures index has hit the limit up 3 times and limit down 3 times. The magnitude and the momentum of the current price action have not been witnessed before.

Yesterday, we talked about cohesive monetary policy as a possible solution for the current turmoil. Policymakers are on it now, they understand that if they want to stem the current crisis, they have to put all of their differences aside, and do whatever it takes to restore confidence. The US, the UK, and the EU announced a series of ambitious measures to ward off a possible deep recession.

French and Spanish governments announced a package of 45 billion Euros and 200 billion Euros respectively. There are also strong possibilities of nationalizing some of the companies in France who will have difficulty surviving this crisis. Over in the UK, the Chancellor announced 330 billion pounds of government-backed loans and guarantees to help businesses. An additional 20 billion pound of measures were also declared, that includes suspending business rates and special grants of 25K pounds for any small business. Moreover, the Chancellor also broadcasted a three-month mortgage holiday and more measures on income and employment are to follow soon. The US followed and their measures could add up to one trillion dollars, along with 300 billion dollars in deferred tax payments.  These measures are mammoth, and the Trump administration needs to make sure that none of this money is utilized in stock buybacks, paying dividends or heavy bonuses.

We are clearly in uncharted territory and it is applaudable that policymakers around the globe have got their heads together because, without the fiscal bazooka, we would be in a dire situation. The bazooka that was announced by the US yesterday certainly created a “fear of missing out” among equity investors and this pushed the US indices towards their high of the day during the closing hours.

However, today, some investors are questioning if the current fiscal measures are strong enough to save us from recession. This is because the widespread of the virus and wholescale economic shutdown, during the last few weeks, and is something which no one has faced, and it is immensely difficult to model them in an economic model as an analyst.  

Nonetheless, just to put some numbers in perspective, in terms of market reaction, the S&P500 index closed higher with a gain of 6%, the Nasdaq with 6.46% and the Dow Jones surged 5.20% or 1048 points. Apart from Nasdaq, the rest of the two indices are down over 20% YTD while the Nasdaq has lost 14.42% of its value.

Back in Europe, the politicians have announced that they are closing their borders so that they can keep a lid on the spread of the virus. Although the initiative is necessary, it will disrupt the food supply chain immensely and consumers are likely to face a shortage of daily essentials.

In terms of equity markets, investors are fretful that banning short selling may create more chaos, but it is the right strategy adopted by regulators. The Italian government extended the ban on short-selling for another 90 days, and I believe other governments should adopt this as well, in order to bring the volatility of equity markets under control.

Gold

In the commodity space, the gold price is back above the 1500 mark. This confirms the safe-haven is holding its support zone of 1,444 and it is improving its safe-haven credential. The price retraced from its high of 1546, yesterday’s high, due to lack of momentum. But the fact that loose monetary policy is here to stay for the foreseeable future among major central banks, gold holds an attractive position.

Oil

As for the black gold, it is haunted from all angles. The wrecked demand, excess supply and the ongoing supply war between Saudi Arabia and Russia is adding further trouble for traders. The price is in a strong downward trend and it is likely that we may see the price breaking the level of 26.05 formed back in February 2016 during the supply glut. As long as the supply situation and coronavirus outbreak doesn’t come under control, investors do not see any point in getting involved in this trade, despite a deep discount.

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