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March Market Recap: Credit, Crisis, and Coronavirus | What you need to know

By:
Rosario Pisana
Published: Apr 9, 2020, 08:53 UTC

We have closed the first quarter of 2020. It's been difficult months for the market because while most of the investors were well aware of being close to an end of the economic cycle, nobody could have expected such a shock on the economy due to the Coronavirus pandemic

Corona

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As a matter of fact, in March financial markets have been uniquely driven by news and updates about the pandemic situation: from the equity market to FX and commodities all major movements have been driven by the COVID-19.

Traders and fund managers have basically put the economic calendar on the side and focused on the geographical spread of the virus and government measures about it. The monetary interventions of the Central Banks and the fiscal stimulus, recently launched by the main countries will need the epidemic to dissolve before looking to have some effect; unfortunately, the development phase of contagions in America leaves no room for optimism for the next 40/50 days.

In the meantime, the world economic context is exposed to an unprecedented drop that no one will be able to tackle in the short term. Currently, the priority is to avoid a chain of defaults that could transform this crisis into a global depression and therefore it is absolutely essential to provide all the necessary liquidity, both from the Central Banks and from the governments, to financially support all the main sectors of the economy. The United States rapidly provided monetary and fiscal support interventions but is preparing to be hit by the speculative credit crisis that is circulating abundantly in the US economy.

US and Europe: Buyback, Fiscal Policy and Eurobonds

All the attention and hopes are concentrated only on the recently approved fiscal plan, but the risk is that if the crisis seriously hits the financial system, the all tax plan might not be enough to support the system. We will see what actions will be taken but it will be impossible to find the money necessary to save everyone and the priority will be given to the most representative companies for employment, industrial / technological and symbolic value.

The problem of outstanding speculative credit is not only a problem of the United States. In Europe, Germany’s tax plan (4.5% of GDP) is ready to be implemented but we can expect it will be implemented at the bottom of the crisis and not immediately.

Italy and Spain will come out with the economy on their knees and a public debt totally out of control. The debate on Eurobonds has just began and will certainly be a source of growing political tension between European partners. However, one thing seems certain: the virus created the conditions for deciding whether further EU integration will be carried out or whether everything will be skipped.

Personally, I believe that Germany’s deflagration of the Euro area is not convenient and a compromise will have to be found towards a revision of the functioning of the Union; otherwise we will have another global crisis that will overlap with the one currently underway and it is not daring to think about what we will face in a similar scenario. When the contagion from Coronavirus is over, the western economy will end up with a public debt of Japanese size and the Central Banks that will have to print money indefinitely.

In this context, a potential long-term (multi-year) upward trend for the Gold and a long phase of dollar weakness due to the monetization of the US debt (already started) is outlined. Certainly, when the lockdown is overcome, the markets will rise but the prospects will no longer be the same as before. If labor costs rise and taxes for companies also, ROE is destined to fall, as well as EPS, which can no longer be manipulated by the Buy Backs that have already been stopped.

Buy Backs have been the main driver of the stock market in the last 10 years. From 2009 to 2019, buybacks have topped to 5.23 trillion USD (it equals 20% of US GDP), which together with dividends (approximately 3.5 trillion USD in the last 10 years) have been the main component of stocks market growth.

Our Selected Assets and Investment Opportunities

In the corporate and government bonds, the best investment opportunities might come from the EM (Emerging Markets), where the return on capital will be greater and the economic and financial equilibriums less compromised or, at least, with a greater chance of recovery.

Gold has also delivered positive returns year to date, up nearly 5%. The precious metal, after the strong sell off in the beginning of March, received a boost from a lighter dollar first and then from the shutdown of swiss refineries responsible for more than 70% of the market production. Gold closed in march priced above 1,550$. We still have a long view in the medium term, giving good buy opportunities at every contraction of the main trend.

On FX market, volatility came back in March, where most of the pairs have been mainly driven by movements in US dollar. In the first days of the month, in the extend of an ultra-expansive FED, the greenback had lost its characteristics of safe haven, with a devaluation against the main cross.

A subsequent strengthening of the currency appeared again during a consolidated drop in the equities. This finds the explanation in the macro behaviour of the investments: 70% of the investors get financed in USD, in order to invest on different asset classes. In the moment of the disinvestment, they purchase USD pushing high the value of the currency.

On the EURUSD we have seen the pair being pushed to its lowest levels since April 2017, breaking 1.0650, to jump back on 1.10 level at the end of the month. In general, we could expect in the future new interest in purchasing US dollar in the moment that equities might suffer other losses.

On the energy side, WTI has been on the radar of all market participants, caught in a perfect storm at the OPEC+ meeting held on March 7th, which saw the collapse in negotiations between Saudi Arabia and Russia. This led to oil prices falling by more than 60%, trading in March as low as 19$ per barrel. The combination of both a demand shock (from the coronavirus outbreak) and a supply shock (Saudi increase in production) is essentially unprecedented, with no equivalent in the last 30 years that we can point to.

Oil prices we see currently are uneconomical for almost all market participants. While higher-cost producers like US shale clearly cannot afford to produce at the current prices, Russia for sure is far away from being able to have positive margins from the production. Saudi Arabia, even though is having very low production costs, also has domestic spending that need in the long-term oil prices to increase. In general, it is calculated that a fair value for oil producers is 42$ per barrel. The clear buy opportunity has to be weighted, taking in consideration the contango of the oil futures.

Instruments Mar-20 6 months YTD
S&P 500 -12.74% -14.37% -27.09%
DAX -18.47% -27.30% -34.92%
GOLD -0.81% 6.65% 3.87%
WTI -54.77% -63.18% -67.25%
EURUSD -0.14% 1.14% -1.74%
GBPUSD -3.04% 1.86% -5.87%
USDJPY 0.07% -0.91% -0.57%

The article was written by Rosario Pisana, Chief Trader and Analysist at MayfairBrooks

About the Author

Rosario Pisanacontributor

Head of Trading at Mayfair Brooks Group. Rosario developed his career in positions ranging from Prop.

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