After suffering heavy losses since March, equity indices rebounded during the past week. It is unclear yet if this is a bear market short squeeze as it happened at a time when macroeconomic data has started to deteriorate sharply.
There seems to be two catalysts for the improved sentiment (i) on the medical front, new hospitalisations in New-York is decreasing and both the rate of fatalities and infection are improving in France, Spain and Germany. Also, the widely followed epidemiology prediction model of the University of Washington significantly lowered the expected number of fatalities in the US and Italy announced that it will end some parts of the lockdown on May 4. (ii) On the financial front, news emerged of another stimulus package which would include direct payments to individuals, extended unemployment insurance and new loans to small businesses. Nevertheless it was the announcement of the US FED in the face of deteriorating labour markets which caught the eye (chart above); a package of USD 2.3 tn in loans to small businesses and municipalities and the promise of buying lower quality debt in fixed income markets.
No doubt the FED announcement came as a result of second round contagion effects of the lockdowns to businesses and consumers. The number of people filing for jobless claims exploded well above consensus estimates and the 17 million job losses since March make up nearly 10% of the entire workforce. PIMCO estimates that US GDP will contract by 5% this year. Across the pond, Eurogroup Finance ministers agreed to a EUR 500 bn stimulus package which will help mitigate the effects of the downturn.
While the overall situation remains unclear, it is worth remembering that just a few weeks ago there were proposals to shut down volatile stock exchanges and panic as to how covid-19 tests would be funded in the US.
Therefore we should not underestimate the ability of businesses to innovate; restaurants could offer explicit table cleaning protocols or less dense seating to boost demand. Airlines could fly with empty middle seats and hotels could screen their clients to satisfy health protocols.
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13 April 2020
Slowing Infections Rate Will Boost Short Term Confidence
Highest ever monetary easing by FED stabilizes the S&P500
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