Colin Williams, Senior analyst at International Investment firm, EXANTE, discusses the manic Monday and the current situation of the stock markets.
Q4 2019 hedge fund letters, conferences and more
Manic Monday: More Bad News
Just another manic Monday. We start the week with US futures bouncing off limit down with S&P currently printing 2215. More bad C-19 news and congress wrangling over the big emergency rescue package.
Amid the turmoil in the public markets and the staggering macroeconomic environment, it should come as no surprise that the private markets are also struggling. In fact, there are some important links between private equity and the current economic environment. A closer look at PE reveals that the industry often serves as a leading indicator Read More
Bonds are positive with US 10s at 0.81 percent. Last week's range 0.50 percent - 1.18 percent.
The dollar index (DXY) has gone from 94 on 9th March to 103. A massive move as the world rushed to buy dollars to meet margin calls and find safety.
German chancellor Merkel has quarantined herself. New Zealand has also gone into full lockdown. Global cases top 340,000.
It is not hyperbole to use the word 'depression' to describe the unfolding deep economic downturn.
The world had never (anywhere close) recovered from the Global Financial Crisis. The $15 trillion quantitive easing (QE) was a powerful reflationary tool but the real expansion came from Emerging Market utilisation of cheap dollars and China's inflated banking system that went from $7 trillion to $24 trillion since the crisis. Bubble economics to cure bubble economics.
Central Banks And The Economy
Can the Central Banks continue to backstop the system and reflate the world economy?
One fallout is the 'carry trade' (ie borrow in dollars to lever into high yielding EM bonds). Even after Friday's rally (yield decline) yields last week were:
Peru +96 bps, SA +70 bps, Turkey +44bps, etc. If you are heavily leveraged into these trades, that's bad.
EDJ0 futures are down 8 bps at 9906 showing tremendous demand for near term funding.
There are warnings that the US commercial mortgage market is seizing up. The Fed had pointed this out even before C-19 struck. They got that one right.
Goldman's expects a 24 percent fall in US Q2 GDP. Markets are wide and thin. Irrespective of the passage of the virus the fallout from this will take a long time to unravel.
On a brighter note, last week fish could be seen in the canals of Venice for the first time in years and global air quality has improved markedly.
Senior analyst Matthew Hinman adds agrees that this could be more of a depression than a recession. He adds:
A Recession is commonly measured by two negative quarters of GDP growth so we won’t know until the end of the second quarter if we are actually in a recession by definition, but history would dictate that we would already be half way through the recession which on average lasts for 11 months. A depression is a rather more lengthy contraction of growth lasting years not quarters, coupled with over 25 per cent unemployment and a 10 per cent drop in real GDP. St Louis Fed President, James Bullard revealed last night that unemployment in the US could be as high as 30 per cent in Q2 with a contraction of up to 50 per cent in GDP.
Markets operate as a forward looking measure of economies and this means that even during a recession we can see not just a bottom in markets but significant gains. I believe the market won’t truly bottom on any measure of stimulus but a return from panic to some semblance of confidence that we are winning the war against the virus or at least have more control over the health situation. Only time will tell if we are in a depression but markets will have already bounced by the time we know.