Daily Comment (March 17, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EST]
Happy St. Patrick’s Day! To celebrate the holiday, we think it would be great if the markets could end the day “in the green.” However, much will depend on news flow related to the COVID-19 “black swan.” With so many fast-moving developments, equities could easily turn back into the red. On that colorful note, we review the latest news on the epidemic and a few odds and ends related to the oil market, Russia and Israel.
COVID-19: Official data show confirmed cases have risen to 185,067 worldwide, with 7,330 deaths and 80,236 recoveries. In the United States, confirmed cases rose to 4,661, with 85 deaths and 17 recoveries.
- Real Economic Impact. Continuing recent trends, governments around the world keep ratcheting up the required or suggested restrictions on mobility and public gatherings. Yesterday President Trump suggested avoiding groups of more than 10 people for the next couple of weeks, and he warned that the crisis could last until July or August. The statements, coming right before market close, helped send equities plunging. Separately, the European Commission proposed a 30-day restriction on nonessential travel to the EU, and French President Macron ordered a nationwide quarantine that bars people from leaving their homes. Many airline companies are in danger of bankruptcy if they can’t slash jobs and nail down state support by the end of May. Companies ranging from Volkswagen (VWAGY, 11.52) to Airbus (EADSY, 18.46) have now imposed temporary shutdowns on all their European manufacturing facilities.
- Financial System Impact. As we’ve been discussing recently, a key issue with the disruptions in the real economy and the Saudi-Russian price war is that they’re producing or exposing strains in the financial system. For firms trying to borrow in the commercial paper markets, spreads over Treasury obligations have blown out to their highest level since the 2008 financial crisis. That helps explain the rush of firms to draw down bank credit lines, which in turn helped spark the weekend’s liquidity moves by the Fed. The scramble for dollars is also producing stress in the cross-currency basis-swap markets that many foreign borrowers rely on to access greenbacks. While the Fed eased the terms on which it provides swaps to five major central banks on Sunday, it may need to offer help for more countries in the near future. Separately, the Australian government has asked brokers to trade less frequently to avoid taxing an exchange system under stress from reduced staffing and people working from home. That raises a concern that major financial markets may even be closed at some point. In fact, the Philippines has already halted all stock, bond and currency trading until further notice.
- Fiscal Policy Response. The House of Representatives yesterday approved “technical corrections” to the coronavirus bill that it rushed through on Saturday, after Senate Republicans complained about aspects of the emergency program. For example, the new bill scales back the paid leave provisions to ease the burden on businesses. The new measure would still provide two weeks of sick leave to a wide swath of workers affected by the pandemic (including those who are in quarantine, caring for family members with COVID-19 and those with children whose schools or daycare centers have closed). However, an additional 10 weeks of paid leave would be limited to workers caring for a child whose school or daycare has been shut down. Healthcare providers and emergency responders, as well as workers who had been in quarantine or caring for a family member affected by the virus, wouldn’t be eligible for the additional 10 weeks of leave. Reports this morning say the Trump administration will also seek an additional $850 billion in stimulus spending. Separately, EU Competition Commissioner Vestager released a draft state-aid proposal that would allow EU governments to make direct grants or tax concessions to companies, provide subsidized bank loan guarantees and allow subsidized public and private loans to companies. On the other hand, when aid is offered, it’s important to keep an eye on any strings attached. Ominously, French Finance Minister Le Maire not only laid out a €45 billion economic rescue plan, but also said the government might have to nationalize firms in order to save them.
- Monetary Policy Response. Pressure continues to build on the ECB to further ramp up its bond purchases in order to arrest surging borrowing costs for Italy and other Eurozone countries. Separately, Turkey’s central bank today slashed its benchmark short-term interest rate to 9.75% from 10.75% previously. To pump liquidity into the banking system, it also launched new 91-day repo auctions at a rate 1.50% lower than the benchmark rate. It also cut bank reserve requirements and broadened a lira-dollar swap arrangement for banks.
Oil market: The International Energy Agency has warned that the Saudi-Russian price war and the COVID-19 epidemic will cut the revenues of “vulnerable” producing countries like Iraq and Nigeria by up to 85%. The warning highlights how the combined crises could spark significant fiscal stress for many less developed countries.
Russia: The highest Russian court approved President Putin’s constitutional changes, which were passed by parliament last week. The court’s approval removes one of the final barriers to Putin potentially staying in power until 2036.
Israel: President Rivlin has given former military chief Gantz the first crack at forming a government after this month’s inconclusive election. However, Prime Minister Netanyahu is appealing to legislators in Gantz’s coalition to join with him to form a broad coalition in which Gantz and Netanyahu share power.