High tension in the markets

news-single-imgcaption" style="width:240px">Pierre-François Donzé

–

The financial markets are facing an unprecedented disruption, the term of which is largely unpredictable. The key variable is how long the global economy will freeze. However, this is conditioned by drastic measures to curb the spread of the virus, with a confinement that is becoming widespread. The cost of this pandemic, in human terms and in terms of economic growth, is very difficult to quantify, which exacerbates the volatility of all financial markets. At the corporate level, there is talk of a drop in profits from 15% to 20% on average.

The news that the Democrats blocked the Senate bill this weekend with nearly $ 2,000 billion in budget support, just 47 votes in favor, while 60 were needed for its passage, does not help things. The Democrats believe that the planned measures amounted to a rescue of Wall Street and businesses with very little for the workers. When a Fed official spoke of an unemployment rate that could climb from 3% to 30% and a potential fall of 50% in US GDP in the second quarter, concern increased.

The past week has been marked by a real dip in the S & P500 which has swept away the gains of 2019 and more. March is not over yet, but it is already the largest monthly decline in the history of the index, equivalent to that of November 1929 during the Great Depression. The acceleration in the number of cases tested positive for coronavirus in the United States (more than 30,000) and efforts to contain its expansion, with containment measures in several states, have exacerbated fears of economic depression. European stock markets held up relatively well, falling by around 3%. This can be interpreted as a positive reaction to the ECB plan, with a program to buy 750 billion euros in bonds, and to the huge packages of budget aid that are about to be released by governments.

Central banks and governments are stepping up their response to this crisis, to limit liquidity problems and offer public guarantees to businesses and households. The former have aggressively cut their intervention rates and instituted major quantitative easing programs. The second detonates budgetary measures (32 billion francs more in Switzerland). However, a coordinated response from these entities is lacking at the global level. The sovereign bond market is trying to digest the dramatic implications of budget programs on public debt. A narrowing of the spreads of the peripheral countries of the euro zone was observed (-40bp for Italy). The private bond market is particularly volatile with a widening of yield spreads not seen since the 2008 financial crisis.

* Discretionary manager of Banque Bonhôte & Cie

– .