March 23, 2020
ECB bazooka calms markets a bit
SNB keeps rates same
Nikkei closed Dax -3.39%
UST 10Y 0.82%
Asia and EU
North America Open
Global markets were sharply lower with futures hitting limit down less than five minutes after the start of trade on disappointment that US legislators were unable to reach consensus on the stimulus deal Sunday night, but as the overnight session wore on risk flows improved somewhat on hopes that some sort of a compromise could be reached by end of the day today.
The Senate majority leader Mitch McConnel found himself in the unusual position of being in the minority after Senator Rand Paul tested positive for COVID-19 forcing five Republican senators to go immediately into self-quarantine as precautionary measures. This allowed Democrats, led by Chuck Schumer to block the pending legislation which they contend simply sets up a half-trillion-dollar bailout fund for large corporations almost at the full discretion of the Treasury Secretary without providing any meaningful payments to US workers who are facing a near cataclysmic shock to their finances as nearly half the country goes on lockdown.
As we noted at the start of Asian trade, “So basically we are trading Congress futures on Monday – watch leaks, counter leaks and a variety of flexes as the day proceeds but they will do a deal unless they want to be tarred and feathered so bounce by end of the day is likely.” The futures markets are certainly positioning that way with SPs and Nasdaq off the limit down lows as traders hold out hope that a deal will be made.
There is tremendous political pressure on both sides to not repeat the mistakes of 2008 when Congress failed to pass the TARP legislation the first time only to see markets go into a freefall. Today’s financial situation is perhaps even more perilous because economic activity across the OECD has come to an almost universal halt and absent a backstop could send the key global economies into depression rather than just a recession with some analysts forecasting a -30% fall in GDP in Q2 this year.
With stakes so high, some sort of deal is likely and if the Democrats get their way it may even more stimulatory if the end result means a greater direct transfer of funds to laid-off workers, but for now the risk of failure remains highs and volatility in the markets will remain in place. Still, it’s not improbable for equities to go from limit down to limit up today if a deal is struck.