March 17, 2020

Special Report: What Could Make The Markets Go Normal?

Special Report: What Could Make The Markets Go Normal?

Global equity markets have been in major turmoil since governments and central banks have started to acknowledge that Coronavirus is a real threat. The fact is that government and central banks have been late in acknowledging that it is a significant threat to the global economy, and have failed to respond to it accordingly.

Failing to address this issue at the very beginning has caused this pandemic. Nonetheless, there is no doubt that central banks of developed markets have been immensely active to calm the markets, and they are looking at every possibility to calm the market nerves. But despite this, we have financial markets that have been off the rails.

The Dow Jones had its biggest one day drop in the history of financial trading, it plunged nearly 3,000 points yesterday. Donald Trump’s speech during the final hour of trading yesterday only made matters worse.  He acknowledged that normal conditions may not be restored until August. But one needs to give him credit that the president is pushing every single department to get the best out of them. For instance, the Federal Reserve has cut the interest rate to zero.

So, the dilemma which investors are facing is that what would it take for the markets to behave normal, and where should one park their money until then?

We Don’t Need More Interest Rate Cuts

One thing is for certain, that we do not need any further interest rate cuts from central banks. This bazooka has no power at all because central banks have done enough in this realm. If slashing the interest rate could help the markets, then we should have seen the biggest rally in the US equity markets yesterday when the Fed surprised the markets with their enormous interest rate cut. So far, central banks have shown their united front. Pretty much, all of them have axed their interest rates but financial markets have not paid any attention to this because all markets are down more than 25% from their all-time high and some of the markets are down as much as 40%, for example, the FTSE MIB index. The bottom line is that central banks have done enough, and now, they should be only utilizing their tone to assure the markets of their support

Fear Of Liquidity Crunch Needs To Ease Through Special Entities

Fear of a credit crunch or liquidity drying out of the system is still real and this is the biggest threat amongst small to medium-size businesses. The reason is that small to medium-size businesses do not carry too much free cash flow and the amount that they usually hold will only help them last between three to four weeks, at max. If these business starts to default, then we have an issue with banks going under stress, and if any of the major banks fail, then the domino effect begins. I have talked about this before: coronavirus is only a transitory concern until and unless there is no impact on demand due to higher bankruptcies.

Direct credit lines for the business under pressure could help them, this is something which has been talked about before, during the European banking crisis and is known as helicopter money. Of course, there is no such thing as a free lunch, we have seen how governments build their stake in banks during the financial crisis, but the initiative saved the system from its total collapse. Measures that are similar to these lines would certainly help businesses. After all, we have trillions of dollars coming into the system from the IMF, and other financial bodies. The creation and appointment of special entities can help small to medium businesses.

A cohesive Fiscal Response

Politicians need to take a leaf out of the central banks’ book and look at how they have acted together to show the world that they are there to support the system. It is time for politicians to not only act but deliver on the fiscal front. For instance, the initiatives to delay mortgage payments, suspend utility bills, cut tax and business rates for a long period is something that can re-instate the confidence and provide the assurance that Is needed.

Better Economic Numbers

Until and unless, we do not see some of the economic numbers performing better, it would be difficult for markets to believe that the situation has hit the bottom. Even one major economic reading out of China or the US could influence other numbers. Soon, if investors see a couple of better readings, I believe that would be the end of the current crisis or at least the end of the current pace of sell-off where equity markets such as the Dow Jones falling more than 1000 points on average.

The Outbreak Number Needs To Come Down

The moment we see some sort of evidence that the virus situation is under control, I believe that would stem the current sell-off in the markets. So far, we are looking at a situation where countries like the UK have not taken the necessary steps of closing schools and universities, and I believe due to lack of appropriate actions, we are likely to see the situation becoming worse before it gets better.  

Whilst Coronavirus is no one’s fault, it would seem that the reckless action (or lack of) of the British government is adding coal to this spreading fire. Whilst other countries are taking necessary measures such as closing schools and universities, the British government insists that doing so is unnecessary and that they are in control of the situation.

Where To Invest?

In times like this, where safe-haven is no longer behaving like the safe-haven, it has become cumbersome for investors to find a safe shelter. Sadly, the answer is still the same, the precious metal is still a better place to park their money because at current levels it is a bargain and the moment we see the coronavirus coming under control, and institutions would not need to sell their positions in gold at the current pace to safe-guard themselves from margin calls, the gold price would rise.

US Treasuries is another place where investors could park their money with lower risk.

Finding good stocks that pay handsome dividends or stock likes of Amazon, Google, Microsoft, Visa, Walmart which have shown fair resilience to current turmoil could be an option for them.

Finally, staying cash-rich is the safest strategy of all become everything is going on sale and when you want to go shopping, you need to have liquid assets or cash.

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