by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Well, it’s Wednesday, and we face another day right out of a post-apocalyptic zombie movie.  While there is still no sign of zombie armies marching on Washington, there is a more worrying sign that global financial markets are seizing up in a desperate scramble for liquidity.  Policymakers around the world are pledging in unison to do “whatever it takes” to rescue the global economy, which is a good thing, but markets will remain volatile until real results are visible.  Below we review all the key news from the crisis and beyond.

COVID-19:  Official data show confirmed cases have risen to 203,529 worldwide, with 8,205 deaths and 82,107 recoveries.  In the United States, confirmed cases rose to 6,496, with 114 deaths and 17 recoveries.  Most disconcerting, the slowdown in the real economy is exposing or exacerbating financial weaknesses.  There are increasing worries about businesses and individuals not only having trouble paying their everyday bills, but also covering the high levels of debt they took on during the boom of the last decade.

• Real Economy Impact.  In a Financial Times Op-Ed, former Fed Chairs Yellen and Bernanke warned the world’s central bankers and governments to focus on making the virus crisis as short-lived as possible.  In their view, the main danger is that if the crisis is prolonged, established economic relationships will get broken and healthy businesses will go bankrupt.  Then, it would be difficult for people to find the same jobs, for businesses to get new credit lines, and for the economy to get back to the way it was.  They emphasized that the central banks need to make sure credit remains widely available for firms and individuals under stress.  The Yellen/Bernanke warning comes as reports show imported infections spiking in some Asian countries where it previously seemed the pandemic had been brought under control.  Preventing imported cases will likely become even more difficult now that the pandemic is spreading even in Africa and Latin America.  Even as imported infections loom, a survey shows one-third of manufacturers in southern China are facing supply shortages despite the recent sense that the country had passed the worst of the crisis.
• Financial System Impact.  Despite the loosened monetary policy around the world, we continue to see signs of a desperate dash for dollars.  Fund managers are selling even the most liquid safe-haven assets to raise cash, so government bond prices are slumping all over the world this morning.  The selling is reportedly being exacerbated by investors’ concern about burgeoning debt issuance in the coming months as governments seek to fund their crisis fiscal plans.  At the same time, heavy selling has left both Vanguard’s and Blackrock’s total bond market ETFs trading at steep discounts to NAV.  Commodities, including gold and other precious metals, are also being sold off to raise cash.  As long as margin calls and debt repayment concerns persist, even the supposedly safe-haven assets could remain volatile and under pressure.
• Fiscal Policy Response.  The Trump administration yesterday said it was working with Senate Republicans on a Phase III economic support package totaling some $1 trillion.  That would include up to two direct payments to individuals costing $250 billion each, some $50 billion in aid to the airline industry and as much as $500 billion to help small businesses and cover other expenses.  The first payment to individuals would come around the end of April and would be means tested so it doesn’t advantage the wealthy.  Some Republicans are still uncomfortable with the provisions, but Senate Majority Leader McConnell is pushing for passage, saying, “My counsel is to gag and vote for it anyway.”  The Phase III legislation would supplement the Phase II package consisting mostly of paid sick leave, which has already passed the House, and the earlier Phase I package of about $8 billion focused on vaccine research and other medical initiatives.  In contrast, investors are increasingly worried that Chinese policymakers don’t have the stomach to launch a big, new monetary or fiscal stimulus like they did in 2008.
• Monetary Policy Response.  To help ease financial conditions, yesterday the Fed said it would revive the Primary Dealer Credit Facility used in the 2008 financial crisis.  The facility is designed to expand cheap loans to primary dealers (the 24 large financial institutions that serve as the Treasury’s exclusive counterparties in financial transactions), by allowing them to borrow against some stocks, municipal debt and higher-rated corporate bonds.  However, just as with fiscal policy, some major institutions are hesitating about how far to push monetary measures.  In controversial remarks published today, Austrian Central Bank Governor Holzmann said that the ECB shouldn’t step in to support the bonds of heavily indebted countries like Italy, and that a recession might have a useful “cleansing” effect on the economy.  In a stunning throwback to the traditional Austrian school of economics, Holzmann said, “One should be careful that only the firms capable of surviving do survive, and that others that would have failed even without a crisis don’t survive.”  Eurozone leaders are also at odds over using the ECB’s massive, €500 billion “European Stability Mechanism” to offer credit lines to multiple states.  Germany and the Netherlands, in particular, are resisting the move.

United States:  In yesterday’s Democratic Party primary elections, former Vice President Biden won all three key races.  With his wins in Florida, Illinois and Arizona, it appears he would only have to win 42.8% of the remaining delegates to the party’s summer convention in order to win outright in the first ballot.  The wins heap even more pressure on Vermont Sen. Bernie Sanders to drop out of the race.

Argentina:  President Alberto Fernández has proposed a further hike in the country’s soybean export tax to 33%, just months after he increased the tax to 30% from the previous 25%.  However, the powerful farmers’ lobby is now starting to push back by launching protests.  Along with the global coronavirus panic, the tension is negative for Argentine stocks and bonds.

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