- Weekly market focus
- Markets wait for virus-relief bill
- Fed and central banks around the world slowly calm the markets with liquidity blastÂ
- Scale of the U.S. economic damage will be massive
- Europe is hit hard
- Markets see extraordinary moves
Weekly market focus — The U.S. markets this week will focus on (1) whether Congress can quickly pass the large rescue bill they worked on over the weekend, (2) whether there are new systemic cracks in the financial system that the Fed needs to address, (3) whether the NYSE runs smoothly today as it goes fully electronic due to the shutdown of the trading floor on coronavirus concerns, (4) whether the Fed has sufficiently dampened the overseas panic for dollar liquidity with its greatly expanded dollar swap lines, (5) oil prices as Reuters reported last Friday that President Trump is sending an envoy to Saudi Arabia in an attempt to broker an oil-price support deal, and (6) the Treasury’s sale of $131 billion of T-notes this week as part of its regular auction schedule.
Markets wait for virus-relief bill — The markets are waiting to see how quickly Congress can finalize and approve its third virus-relief bill. Stock futures plunged by the -5% limit in early trading on Sunday because the two sides are deadlocked on key issues.
Fed and central banks around the world slowly calm the markets with liquidity blast — The Fed last week very quickly pulled out all the stops and has been successful so far in preventing a systemic meltdown of the financial system. The Fed used its experience from the 2008/09 financial crisis to quickly put to work many of the tools that it used back then, plus some new ones.
The fact that the Fed means business can be seen by the fact that the Fed last week already purchased nearly half of the $700 billion of Treasury securities and MBS securities that it said it would buy by year-end. Specifically, the Fed last week bought $272 billion of Treasury securities and $68 billion of mortgage-backed securities. The Fed’s purchases helped to provide liquidity to the Treasury market and narrow bid-offer spreads to keep that key market functioning.
Meanwhile, the Fed in the past 1-1/2 weeks slashed its funds target range by 150 bp to 0.00%/0.25%. The Fed last week also activated specialty facilities to provide direct funding to the commercial paper market, primary government securities dealers, money market funds, and the short-term muni bond market. The Fed has also blasted dollar liquidity out to the rest of the world with expanded dollar swap lines with all major global central banks. The Fed’s liquidity firehose will continue this week on whatever scale the Fed believes is necessary to try to prevent a systemic breakdown.
Scale of the U.S. economic damage will be massive — The U.S. economy is experiencing severe damage with an estimated 20% of Americans being told to stay at home and with non-essential businesses in those areas being told to temporarily close for at least two weeks.
Goldman Sachs last week issued an eye-popping estimate that U.S. GDP could fall by -6% (q/q annualized) in Q1 and -24% in Q2. Goldman then forecasted a recovery of +12% in Q3 and +10% in Q4, leaving 2020 annual GDP still down -3.8% from 2019. The Goldman estimate implies a peak-to-trough decline in GDP in the first half of about -7.5%, which would be much worse than the Great Recession’s decline of -4.3%, though much less severe than the -30% decline in the Depression. Goldman is forecasting a surge in the unemployment rate to 9%, just below the 10% peak hit during the Great Recession.
Current economic projections are of little use, however, since it is unknown how bad the pandemic might get and how long the stay-at-home orders and business shutdowns will last. On the more positive side, there is the outside possibility that a treatment or vaccine will be found quickly enough to dampen the pandemic. A big economic rebound in the second half of 2020 seems overly optimistic at this point unless U.S. officials can get ahead of the virus and substantially curb the number of new cases as China has recently been able to do. However, China was only able to dramatically curb the number of new cases with much tougher restrictions than are being seen in the U.S.
Europe is hit hard — Meanwhile, the pandemic is getting even more severe in Europe, particularly in Italy and Spain. UK Prime Minister Johnson on Saturday said he fears that the UK is only 2-3 weeks behind Italy as he moves to shut down his country. All the countries in Europe are rolling out aggressive fiscal relief and stimulus programs.
The ECB last week acted aggressively by announcing a massive 750 billion euro bond purchase program, which is expected to be operational by early this week. The announcement of the program was successful in curbing the upward spike in the Italian bond yield that occurred earlier last week as the markets worried about whether Italy is headed for a financial crisis with its national debt already at 135% of GDP.
Markets see extraordinary moves — The markets last week saw some extraordinarily moves. The S&P 500 index last week plunged by -14.98%, adding to the previous week’s -8.79% plunge. SPX on Wednesday posted a 3-year low, where it was down by a total of -32.8% from the mid-Feb record high. Global bond yields rose early last week as the markets worried about the need to finance the huge government relief programs that are being proposed. The dollar index last week soared to a 3-year high on emergency dollar liquidity demand. May crude oil prices saw extraordinary volatility last week and closed the week -29.5%, adding to the massive declines seen in the three previous weeks.
Investors are now keying on (1) whether Washington can work together to pass a big rescue bill and pass additional rescue measures in the near future, and (2) whether current social distancing measures are enough to curb the pandemic. If not, then the markets are in for continued severe volatility.
