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Coronavirus and the market

Bulls can take comfort from the scale of the interventions which have prevented a worse rout in markets. Bears will argue that this scale of intervention cannot be sustained.

Silhouette of stressed investor as stock falls

by
John Redwood

in Features

31.03.2020

The domestic news today includes WPP, Rotork, Morgan Advanced Materials and AA cutting dividends and Carluccio’s and Bright House going into administration. There is active discussion that banks should not pay dividends and should rein in their bonus payments to conserve cash and to increase their lending capacity to a very cash-constrained private sector. Garden centres are pointing out that they cannot sell their perishable spring stock which is an important part of annual revenues and profits, leaving them very vulnerable and in need of major cash injections. The food retailers have reported their exceptional recent trading, with sales up 40% immediately after the announcement of an end to school lunches and eating out.

The latest figures for the Federal Reserve Board’s balance sheet shows why markets rallied, with the bond market stabilising after dangerous shortages of liquidity and falling prices. The Fed’s balance sheet is now $1.25 trillion larger than last autumn, with the purchase of $338bn of securities under their QE programme in just one week. US commercial bank deposits grew by an astonishing 2.3% in the week to March 18th as the Fed made liquidity available. The Fed also bought up $157bn of mortgage-backed securities in the last week, made $27bn of credit available through its new Primary Dealer facility, $30bn of assistance through the Money Market Funds scheme and produced $206bn of dollar liquidity for overseas Central Banks.

Bulls can point to this huge statement of intent and take comfort from the scale of the interventions which have prevented a worse rout in markets. Bears will argue that this scale of intervention cannot be sustained and the effects will gradually wear off, as the bad news flow continues. With more reports of cut dividends, terminated share buyback programmes, slashed capital spending and cash shortfalls for many businesses.  The bears currently have Russia and Saudi Arabia on their side as the oil price war intensifies. Saudi has signalled her intentions to pump more oil at these very depressed prices. As a result, oil has been making new lows, with Brent falling as low as $23. Commentators out to make an extreme headline are speculating the oil price could go negative, as tanks fill up and people worry about the lack of worldwide storage capacity for all the oil being pumped.

What matters is the progress of the virus and government decisions based on that, which will dictate how long the extraordinary shutdown should continue. There is a growing realisation on both sides of the Atlantic that there will be a very large cost to what is being done. In the USA, the Democrat Mayor of New York is the voice of the medics and epidemiologists, urging tough restrictions as New York hospitals battle with a surge in serious cases. The President is the voice of middle and corporate America, wanting an early return to normal economically. In Europe, Italy and Spain are so far the worst afflicted and are following tough advice on lockdown, whilst Germany with a strong testing industry is testing more and regarding many of the deaths as the result of prior conditions, not directly attributable to the virus. There is some growing interest in the South Korean way of handling the virus attack, with more testing and tracing, with isolation used for all those who have the disease or have been in contact with those who have it.

We rightly thought the US authorities and other major Central Banks would throw a lot at the markets and would stabilise “safe assets”. That has now been achieved. For the share rally to extend into a new bull market and recovery, we are going to need more visibility on the duration of the lockdown measures in the USA and Europe with a realistic view of an early end. We need some better idea of the damage it will do to the earnings of many companies hit badly on the revenue line, and to the balance sheets of all those badly affected who started with little or no net cash to see them through, say, a three month period with little or no income. Those who do have to hold shares for risk reasons need to concentrate portfolios on the few global sectors and companies that are trading well out of the current adversity like food retail, medical products and online services, or to hold indices and funds that offer substantial exposure to the world technology-backed winners who will emerge stronger from this enforced change in the way so many people have to live.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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