Market Watch. March 2020 I

Market Watch. March 2020 I

Fiscal Stimulus in the US / Monetary Stimulus from the ECB

The European Central Bank has launched an extra emergency bond-buying program worth 750 billion euros ($820 billion) in the latest attempt to calm markets. This program is important but only for one reason: It keeps the Euro government bond markets functioned. We are getting close to modern monetary theory (MMT), i.e. to finance the state budget by issuing government bonds and to put them immediately on the balance sheet of the ECB.

Let me repeat that monetary stimulus is not the medicine for a shutdown. But the states need to have access to new liquidity, therefore it is important that for instance the yield of Italian government bonds stay at relatively low levels. Ironically, the ECB said we are not here to close spreads only to say now the new bond buying program has no limits. Which means they close spreads.

Meanwhile the US is getting closer to approve a fiscal stimulus program combined with a pay cheque for all citizens. This measures ensure that corporates and individuals have cash to pay bills or simply to buy food for the daily life.

Depending form where it is financed, we might see a pure from of  helicopter money.

Meanwhile European countries have as well announced that they will support companies especially smaller businesses with liquidity injection in order to prevent that they go bankrupt. After the shutdown is over the goal is that most businesses will fast be up and running, therefore it is imminent to keep them alive over this special period.

There where several estimates what the impact will be on GDP. Most likely we see a mild global recession, assuming that in Q3 we get back to normal.

That means Q2 will be substantially negative, but key is that all fiscal and monetary measurements will help to bridge the shutdown period and to quickly restart functioning.

Therefore analysis which say we see a 10% annualized negative GDP rate is not to take too seriously. As this would mean 4 quarter in a row with a minus 2.5% growth rate. This seems to be very unlikely as we see in China that after 3 months in most regions, production is almost reaching normal levels, therefore their Q2 GDP will be much better than the actual one.

Today was first day where in Wuhan no new infection patient was reported. Most of the country is back to work and therefore we expect a small but positive impact on global GDP from China in H1 2020.

Currencies, Commodities, Equity & Bond Indices

Before the global shutdown was announced gold was overbought. Therefore one must have expected a pull back. But now gold trades below its 200-day average and might test levels around 1400 USD per ounce. For the last weeks gold did not serve as a safe haven place, by the contrary it sold off with equities and corporate bond. Also during the selloff in 2008 gold temporarily lost value. Therefore, this price trop is not really a surprise. Only after the crisis in 2009 gold started to rise again.

In stress situations correlations of assets are getting very high, i.e. there is no place to hide. In 2008 only governments rallied. This time we have seen a drop in US treasury yields from around 1.20% to 0.3%, only to be followed by a selloff. At the moment the 10-year treasury yield is back at 1.17%

A V-Shape market recover?

Liquidity

The Swiss franc appreciated further against the Euro. Since the ECB announcement of the new bond buying program, we see a pronounce weakening of the Euro. Without the intervention of the SNB we would have seen even a higher exchange rate.

The USD measured by the DXY index has reach the highest level since 9/11. The announced Fed measurements as well as the expected US fiscal stimulus support the dollar. It serve as well as a safe haven currency like the Swiss franc and the Yen.

Equities

The S&P 500 has broken its 200-day average and trades now slightly below the support level at 2400 points. Most strategist expect that we will test levels at around 2200. Intraday we have already gone down to almost 2200.

A PE contraction to around 12 time would as well be equivalent with a level of around 2200.

But this thoughts have a mistake. The actual earnings outlook has still to be revised down. Therefore, following this path we can imaging that a PE ratio of 12 in the S&P 500 might mean levels below 2000. Nevertheless, this all depends on how effective the fiscal stimulus will be.

Fixed Income

Investment grade bond spreads have sharply widened. The same picture can be observed in the corporate high yield market. But the real problem is the missing liquidity. Since 2009 investment banks were forced to close their proprietary trading desks due to Basel III and other regulations. And banks are now not willing to take any inventory of bonds on their books.

Remarkable was that the US treasury market has not for a short time period functioned. Therefore, the recent interventions of the ECB and the Fed are primary to ensure that the government bond markets keep working. It is extremely important that governments can finance their fiscal stimulus through the issue of new public debts.

Alternative Investments

Gold: The gold market is in a consolidation phase. We expect that this will continue for a while, but mid-term gold will probably rise again as after the liquid crisis investors need to park money in save assets.

REITs: During the actual risk off period REITS continue to hold up relatively well. European REITS have outperformed European equities but they are as well significantly down.

Oil: OPEC is going to maximize its output while at the same time we see a collapse in demand. Saudi Arabia is one of the key driver of this price war although their fiscal break-even oil price is above 80 USD per barrel. The US shale gas producers are as well suffering as their average production cost is at around 50 dollars.

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