The COVID-19 Diaries – Day 1 – „Markets can remain irrational longer than you can stay solvent“
With the largest German airline cutting 9 out of 10 flights, emptying financial districts in London and Frankfurt, it is hard to take a long-term view on the markets. Yesterday, the Dow wiped out almost all its gains during the Trump era. Yet, it is still almost double the value as it was before the 2008 crash.
Similarly to the 2008 crisis and to the DotCom burst, the meltdown of 2020 will go down in history books as a black swan as well but as the havoc is still underway, it is challenging to see the causes. World’s largest hedge fund, Bridgewater, which profited from all the aforementioned market downturns is now in the red. However, the firm does not realize losses, it holds its positions as it is expecting a sharp rebound.
Whereas, it is suboptimal to stay in negatively yielding securities, some firms are eyeing a market entry in discounted equities. „While we aren’t suggesting investors go on a buying spree, markets are now trading slightly below our downside case on the S&P 500; given the accelerated move lower, we believe that longer-term investors might start to consider adding to equity risk.“ (source: Morgan Stanley)
The ECB has launched an emergency €750bn package to ease the impact of the coronavirus pandemic. It will buy government and company debt across the eurozone, including that of troubled Greece and Italy. Christine Lagarde tweeted „There are no limits“ to its commitment to the euro. Asset purchase will kick-off as soon as ECB properly analysed the economic impact of the virus, but in any case not before year end. (source: Bloomberg)
Meanwhile, the Federal Reserve continues to adapt its tools to the crisis. Earlier this week, the Fed cut its benchmark federal funds rate to near-zero levels on the heels of a half-point rate cut two weeks earlier. The Fed also announced a $700bn quantitative easing program in order to inject liquidity into the market. The Trump administration and Congress are also working on a stimulus package which may allocate $1tn to help support American taxpayers and small businesses. (source: Bloomberg and Morgan Stanley)
In the Central region, Hungary, Romania and Serbia all try to mitigate loan defaults with prolonging payment periods, capping interest rates and postponing principal payments. Hungarian Forint fell over 10% in recent days compared to Euro and is at an all time-low. Romanian Lei and Serbian Dinar stayed rather constant without swings compared to Euro. In the South-Eastern part of Europe, Croatia and Slovenia are also experiencing economic challenges. Both countries heavily rely on food imports from Italy and other Western nations therefore a potential landlock would cause shortages in consumer products. The Croatian Kuna also fell against the Euro. On the Eastern side of Europe, Russia heavily struggles due to the oil price war and the Ruble took a close to 15% hit as well over recent days.
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The views, information, or opinions expressed in this blog series are solely those of the individuals involved and do not necessarily represent those of PwC Austria and its employees. PwC Austria does not give any representation or warranty of any kind (whether expressed or implied) as to the accuracy or completeness of the information contained in this blog series. It has been prepared solely for general informational purposes. Nothing in this document should be construed as advice to proceed or not to proceed with transactions or any other type of decisions.