Headlines from across the globe show that governments are implementing stricter measures to combat the coronavirus outbreak, all the while adding their respective aid packages to contain the other disaster of insolvency. Governments are slowly waking up to the potential repercussions of a prolonged containment effort and are beginning to change their tack, from traditional business loans and tax cuts to more direct aid.
The US is lagging behind, however, after Democrats blocked a $2 trillion aid package headed by Mitch McConnell, as Republicans and Democrats are at odds over where the funds should be directed. While there is some merit in their arguments, the crucial component of aid is speed. St Louis Fed Chief, James Bullard projected that unemployment could hit 30% and GDP could fall 50% in the second quarter of 2020. Hopefully, the US Senate receives a copy of this report and it galvanises a moment of bipartisanship, although that might just be too much to ask.
On the other hand, the private sector seems to be viewing the massive asset declines as an opportunity. Hedge funds have been raising capital to plough investment into firms that have been undervalued by the broad-brush selling. It’s often hard to tell when a market might bottom, and more than a few firms have been lost taking the first-mover position. In fact, there is well-known market adage which equates this bottom-calling to catching a falling knife; sometimes times you catch it and, well, sometimes you walk away with cuts. In this case, the firepower is considerable and may be enough to determine a bottom all by itself. After all, the market doesn’t turn until there is enough momentum the other way; this might be the first signs of that.
Bottom line: In times like these, the price of Brent Crude oil is a great estimate of expected economic activity, and although not a barometer for valuations, it is sitting at multi-decade lows. In fairness, it has held fairly stable, supported at $25 per barrel since mid-last week. The safe-haven currencies like US Dollar and Japanese Yen have resisted making further highs since about the same time that oil bottomed. This tells us more than economic data releases can when the pace of events moves this quickly. This week, markets will be looking for the additional fiscal response needed to provide a level of support under business valuations, as economic data points may simply be ignored.
The Pound’s trade-weighted index lost over 7% of its value during the previous week, leaving Sterling trading consistently below the 1.20 handle against the Dollar, for the first time since the 1980s. All-in, Sterling has tumbled around 12% against the Greenback since it hit a high of 1.3191 on the 9th March. Clearly, the catalyst for this move has been the continued and accelerated spread of coronavirus globally, which has posed a risk to the UK’s Brexit-weakened economy and a rush to the world’s most liquid currency. Towards the end of the week, we did see the Pound lift from more than three-decade lows against the Dollar, as coordinated central bank action eased demand for the Greenback. In a data-heavy week, we’ll be watching for continued updates from Chancellor Rishi Sunak on the Treasury’s plan to fight the economic threat of the pandemic and the Bank of England’s monetary policy meeting on Thursday.
The Bloomberg Dollar Index – a broad measure of Dollar strength – climbed to all-time highs last week as the scramble for the Greenback continued to rock currency markets. The Index has now gained over 9% since 9th March as risk-off sentiment has dominated markets, with many investors unwinding positions and instead preferring to hold cash. Overnight, the Dollar remained firm despite US lawmaker’s failure to pass a stimulus package to fight the coronavirus. Republicans and Democrats will attempt to agree the $1tn spending package this week, with Democrats demanding increased funding for medical care to combat the pandemic.
Sentiment for the Euro over the past week has been similar, albeit slightly better than sentiment for the Pound. The Euro Index fell by roughly 3% last week, as the pandemic continued to cause devastating damage to some of Europe’s most important countries. The European Central Bank has already responded with plans to expand its asset purchases by €750bn over the next nine months. Markets will be eagerly watching out for coordinated fiscal policy from European leaders, as the region enters what could be a deep period of economic contraction. It’s a data-light week, meaning that focus will remain on the combined efforts to fight the effects of coronavirus.