The update of our Investment Division
What has occurred since yesterday
In his address to the National Union of South African Students in Capetown 1966 in regards to the US-American civil rights movement Robert F. Kennedy said the following: „There is a Chinese curse that says: “May he live in interesting times” If we want to or not we live in interesting times…“.
In the financial markets the synonym for that is called “volatile times” and we are in such a phase.
After one of the worst trading days in history
After historical price decreases on Monday an even stronger price decrease occurred yesterday. The US equity index S&P500 closed at -9.5%, the EuroStoxx 50 even at -12.4%.
Besides the equity markets also the volatility in the FX-markets increased markedly last week. Particularly some Emerging Markets currencies had to accept strong losses. Safe harbours (US and German government bonds) remained largely unchanged yesterday. Yields of 10 year US Treasuries increased during the week slightly to 0.8%. Gold had to accept a loss compared to last week as well.
The markets and Lagarde
From a monetary policy perspective yesterday the ECB and its president Christine Lagarde was in the front line. The Central Bank announced to increase its bond buying program by EUR 120 billion until the year end. Banks will get an easier access to liquidity and their capital reserve requirements will be eased temporarily. In particular the speech given by president Lagarde was not taken well by the markets. Interesting from our perspective was the reference to a meeting of the EU finance ministers on Monday and the urging of the president to announce aligned fiscal policy measures.
The US Federal Reserve announces help
The US Fed announced the allocation of USD 5 quadrillion of liquidity to puffer „temporary disturbances“ in the financial system. The Fed will also increase the purchase of US Treasuries.
The spreading of Covid-19 continues. In Italy the number of infected increased strongly and is now at more than 12.000. Also the number of deaths increased in Italy. Also in the USA more and more cases are confirmed and it seems that infection centers are developing in several US-states and in the capital Washington D.C.
In a positive direction the efforts for a fiscal package in the USA are developing. Nancy Pelosi, speaker of the House of Representatives, announced that she was close to an agreement with president Trump.. But also the financial world seems to be moving together. In the USA investment banks try to get liquidity from hedge funds and other alternative investors to provide funds to corporations which are affected especially hard by the virus.
What will we be observing in the next few days and weeks?
Over the next few weeks, we will continue to keep a close eye on the two main poles in particular, which we have already reported on, on several occasions:
- The development of the virus’ spread and the evidence of successful containment. As can be seen from the examples in China and South Korea, this is quite possible. Furthermore, in Japan the number of people infected has remained relatively low.
- The first point and the associated containment measures will determine the net burden on the economy. Many indicators are currently pointing to a recession. In the short term, consumers are likely to focus on avoiding exposure to the virus as much as possible. The resulting decline in spending on travel and leisure activities will be a burden for the economy in the short term. However, if concerns lessen, consumers may react positively to low oil prices and interest rates.
- Coordinated policy responses from the central banks and government. The G20 countries have already agreed in principle on a concerted policy response, which should now be followed by action.
Source: Johns Hopkins University Link
Our dossier on coronavirus with analyses: https://blog.en.erste-am.com/dossier/coronavirus/