The market was waiting for US politicians to agree to a fiscal tidal wave yesterday and all the while that didn‘t materialise, they were happy to keep selling.
Markets across the globe came lower and the downward pressure on those was met in fairly equal measure by upward pressure on the Dollar, which once again touched new all time highs versus a number of currencies.
Luckily, in the absence of Republicans and Democrats being able to agree on anything, the Federal Reserve stepped in. In fact, the Federal Reserve has gone ‘all in’ with an unlimited QE package that will see them buy as many government bonds and mortgage backed securities as they can get their hands on to keep prices in check. They’ve also decided to take a piece of the corporate credit market and will be buying up existing investment grade debt and investing in a vehicle that will buy corporate debt in primary issues.
If the latter approach sounds familiar, that’s because the Bank of England and European central bank already do this – the difference when the Fed gets involved is that they’re buying those debts with dollars, lots and lots of dollars.
This is great news in the short term. This is what could get the markets out of a jam and give the can an almighty kick down the road. The long term is perhaps not something to focus on for the here and now, but the time will come when people ask just how the Fed intend to unentangle itself from this mess – and nobody is going to have an answer – the reason we know this, is because they’ve tried to do it before and every time they’ve tried the market has refused to go cold turkey. The only difference going forward is that the numbers are even bigger and the entanglement that much greater.
So the market is still going to be pinning some hope onto Capitol Hill agreeing terms for a rescue package and when that happens we expect to see the markets start to take on some risk and rally. The question then becomes whether that can sustain, or if investors will use the pickup in prices to get a better sale price on some of their investments and continue to run for the door – and that’s something nobody will know the answer to until it happens. Hopefully we’ll see something from the White House later today.
The Financial Times has an interesting piece on life insurance companies (morbid start to the day) these companies are in for a double hit, but the main issue isn‘t their increased payouts because of the rising death toll; it’s the bond market that may ultimately get them: Insurers invest the premiums people pay into low risk investments to gain yield which funds the claims. Over the past few years they’ve had to go into riskier corporate bonds to get a return above inflation. In doing so they’ve put themselves in a place where a shock to the system could see bond defaults and they could lose big chunks of money – and now we’re in exactly that situation.
Trump might fuel the death toll if he decides to get America back to work after the two week lockdown. He’s tweeted that “we cannot let the cure be worse than the problem itself” which was telling, as that was a Fox News quote that aired about an hour before the tweet. He sees re-opening less affected areas quickly as a possible option, whilst keeping other areas such as New York on lockdown. If the market thought the UK’s strategy was risky, they’ll have a field day on this.
Today we’ll be patiently waiting in hope for the US stimulus package. We’ll also be getting used to Boris Johnson’s new rules, which ban gatherings and being outside for anything other than exercise or going to get food and medical supplies (he’s basically made my life choices law)