Markets have been talking about the ‘double punch’ that unsettled the benign and plain financial paradigm that we existed in for many years. The full-on right hook came from the Coronavirus that manifested as a simultaneous shock to supply and demand. The left hook came like some kind of bizarre scissor punch in the form of an oil price collapse. I can promise you that I’m not much of a boxer. But if I were to imagine what a boxer might do inside the ring when faced with such an onslaught I’m pretty sure it would be to respond with a similar act of aggression. Given that I hadn’t already been knocked out that is.
Yesterday the market had the opportunity to provide a US-led double punch response to the attack it was facing. The first punch was expected to come from the US government that was debating a fiscal response to the crisis, 25% of which was thought to be spent on Trump’s direct payment to US citizens. There were also provisions for sizeable loans to small businesses, additional liquidity assistance, and investment in healthcare. The second retaliatory punch would have been from the US Federal Reserve in yet another commitment to expanding market liquidity. In the end, the market received only the latter commitment from the Fed as momentum slowed on the $2tn package to support the US economy. The bailout package is still on the table and looks likely to pass but each day of inaction will unnerve the markets further.
Ultimately, the Fed’s action was insufficient alone to placate markets. Immediately after the Fed’s commitment there was a stabilisation of the risk fire-sale that had been taking place over the last few days. However, as markets weighed up the policy response to the developing health crisis stock markets continued to tumble to the benefit of safer havens. The Federal Reserve in a historic move opened two new facilities to the market allowing the Bank to purchase corporate bonds. Okay it sounds about as bland as the plain Ryvita consumers have been stockpiling but it isn’t:
Central banks are the institution in economies that can literally print money. They buy and sell government debt in quantitative easing and tightening cycles by literally inventing money. Their pockets are infinitely deep and the money they create never has to be paid back or made up. Even in the 2008 financial crisis developed markets central bank’s didn’t step into the corporate debt market – it wasn’t seen as a necessary step. However, the infinitely deep wallet is now being used to fund corporate spending directly.
A failing corporation can only stay alive so long as it can borrow in order to fund its commitments. When liquidity dries up in times of economic duress it won’t find people willing to take a risk on it and lend it money. In comes the Federal Reserve, directly funding the debt issuance to provide reasonably priced and guaranteed cash so that they might survive. Despite Trump’s criticism of the Federal Reserve it seems so far that the central bank is doing far more for US citizens than the White House or the US political system.
In the United Kingdom we have entered a lockdown as the public largely failed to heed the social distancing advice that the government had issued. Whilst Sterling reacted negatively to the news of lockdown around 8:30 last night, the Pound is bid this morning parring its losses in the overnight session. Markets have opened up constructively in many sectors as news of Wuhan reopening and Italy’s death toll curtailing reassures investors that this crisis will end.
Discussion and Analysis by Charles Porter