12th March 2020
The market is faced with two highly uncertain bearish shocks in the form of an unholy Covid19 economic catastrophe in Italy, and most of Europe, compounded by a dizzying oil price downdraft with the apparent outcome a sharp price sell-off across all assets. Indeed, nothing is immune from this insidious virus. Still, the market may not be yet pricing in a worst-case scenario from this double whammy risk beat down.
Vacationers and business travelers continue to cancel trips, and social distancing is suddenly a term in common usage. So needless to say, all eyes remain focused on travel bans around the globe. That said, everyone knows the number of reported cases in the US will skyrocket soon because proper testing has begun.
It feels like we're doing little more than moving from one air pocket to the next while the less turbulent air in between is getting supported by the thought of fiscal input. This will eventually trigger an even more aggressive budgetary response globally, but time is of the essence.
Today US President Trump says the US will suspend all travel from Europe for the next 30 days. (Bloomberg) Travel restrictions equal slower global economic activity, so if you need any more coxing to sell risk after a massively negative signal in US markets, it just fell in your lap.
It still feels like the COVID-19 / energy credit wallop hasn't seen its worst deadfall yet as the public health crisis will most certainly mushroom in the US and should be at its worst in the next two to four weeks probably. Only then will the market see from the bottom and maybe start buying the dip.
Corporations are going to start drawing on credit lines en masse, which will probably put more pressure on the system in ways that are hard to quantify or forecast but certainly not in the right direction.
Yes, the global credit markets "sum of all fears" is coming to fruition, and a furious mad dash for cash could trump all other concerns.
With no endgame in sight scenario playing out in the market, the virus headcounts in the US will be of crucial importance, so there needs to be comprehensive testing to arrive at a credible tally of cases.
It sure seems inevitable that numbers will climb substantially higher from current levels, possibly in an explosive way, once testing is rolled out on a large scale. Until then, markets will likely lack the confidence to fade the aggressive sell-off.
But the market response to the critical fiscal policy measures will be essential. But only once investors think that a peak of new cases is in sight, and policies are convincing, may they start rebuying risk.
The first order of business is that in the US, there needs to be comprehensive testing to arrive at a credible tally of cases, without which we have no way to quantify the effectiveness of the next point. That is, there needs to be a policy response, draconian or not, that is perceived as sufficient to stop the virus from spreading further and mitigate economic damage. Both could easily take another few weeks, if not months. The question is, can we stand another week let along another month in Covid19 purgatory with the markets on the precipice of a cliff edge.
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