Bear market rally continues after both US parties agreed on a 2 trillion help program

The US has prepared a 2 trillion US fiscal stimulus program which should today pass through both parliaments. Based on this we see the 2^nd day in a row higher equity markets and more liquidity and more reasonable prices in corporate non-investment grade bonds.

Overall, around 9% of world GDP stimulus has been announced so far. What-ever-it-takes not only from central banks but also from most G20 governments.

Fig. 1: China claims to be almost back to normal

Yesterday, it was announced that citizen of Wuhan can after the 9^th April freely travel in China. Coal consumption is almost back to normal, which also indicates that this is not just propaganda.

Similar thoughts from JPM: 80% of migrants are back to work and 90% of large-scale enterprise are as well working.

Fig. 2: The resumption rate for critical Chinese large-scale enterprises stands at 90%

V-Shape in Europe? Nobody really knows because we are at the beginning of wave 1. It all depends that the taken measures will flatten the curve of new infected people, like we have seen in China, Japan or Korea.

The latest figures about new infected people in Spain are not encouraging. They have caught up with Italy. Both countries have a very high mortality rate per 1 million habitants.

Fig 3: Coronavirus counter

https://www.worldometers.info/coronavirus/

Equity markets trade for the 2^nd day up. We qualify this as a bear market rally. In the best case we are going to test (but not break) the lows we have seen over the last days. US PE multiples are at around 13 times, which is still high, and we reckon that the earnings downgrade cycle will kick in and push PEs up, i.e. the risk for more downside is still significant.

Fig. 4: JPM technical view on the S&P 500

JPM Technical Research: “The S&P 500 Index tentatively responds to the deep oversold conditions and other short-term positive technical signals. The index has not seen anything that resembles bullish follow through since Mar 2. A breakthrough 2’460 tactical pattern trend line resistance this week could trigger a more dramatic position squeeze and counter-trend rally. Next resistance rests at 2’500-2’550, and then 2’680-2’700. Sharp short-term rallies of that magnitude are common in past bear market environments”.

Fig. 5: China where it all started has not had a bear market

Fig 6: US IG had the fastest spread widening since 1972

IG bonds trade now at interesting spread levels, i.e. they look cheap. But it is key to choose companies with a strong balance sheets due to the expected recession. Government bonds on the other hand have after some turbulences offered wealth protection.

Fig. 7: Government bonds have offered wealth protection

What can be done on the fiscal and monetary side is probably mostly announced. It now depends if the 1^st wave of this pandemic can be flattened. If so, we might have a similar restart after the lockdown. Most likely it will take more time in western countries compared to China as we do not completely control citizen.

Published: 25/03/20 by Blackfort CIO Dr. Andreas Bickel

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