March 17, 2020
Futures turn negative
UK labor data mixed
Nikkei -0.06% Dax -3.05%
UST 10Y 0.79%
Europe and Asia:
GBP UK Labor Data 3.9% vs.3.8%
CAD Manufacturing Sales 8:30
USD JOLTS 10:00
After a rebound in Asia trade that saw US futures locked limit up, equity markets began to sell off once again as investor sentiment once again turned sour. The mood in Europe remained grim with Italy, Spain, and France on virtual lockdowns as governments tried to maintain social distancing that has brought almost all but the essential economic activity to a halt.
At this point, investors are essentially flying blind as the length of the containment is uncertain and the economic impact of the health measures could be catastrophic. In US, for example, companies have enough cash on hand for about 60 days of payroll – but that figure applies only to the largest corporations rather than the 80% of small and medium-sized businesses which will in effect become insolvent if the quarantine lasts that long.
We argued yesterday that the COVID-19 crisis is not a financial crisis but rather a consumer and small business crisis that require very unusual policy prescriptions. Instead of creating a hodgepodge of diktats that suspend rent or utility payments which would, in turn, create contractual fractures that would result in bankruptcies to through the system, governments need to create an instant form of Universal Basic income to all their citizens with direct deposits to everyone’s bank accounts for the next 12-16 weeks. That would ensure that the flow of funds will continue during the quarantine period avoiding unnecessary bankruptcies.
Central banks meanwhile need to suppress all interest rates to zero both on the short and long part of the curve in order for fiscal authorities to run large deficits at minimal costs. This is particularly important in the Eurozone where the crisis has creating a widening of the spreads that could be catastrophic to Italy Spain and even France as they try to cope with the crisis. Christine Legarde’s off-hand comments that the central bank does not care about intra European spreads was the single worst policy error of this crisis and she needs to quickly communicate to the market that the ECB will buy every sovereign bond in the region until the rate comes down to zero.
Finally, the one diktat that governments could make would be extremely helpful would be a moratorium on credit card debt. In the US, for example, consumer debt is at an all-time high. Governments then could mandate that all credit card payments are suspended for three months and that all Credit Card interest charges would be zero for 12-16 months after that. This is a radical idea but one that would have a much greater and more immediate impact on any rebound than merely keeping the Fed Funds rate at zero for the next several years.
Whether any of these actions will be implemented remains to be seen. But in the meantime, the volatility in financial markets will remain at record highs and every rally will be a chance to sell until the markets become convinced that the economic crisis caused by the quarantine has been stabilized by policy.