Weekly Market Insight

Daily Global Market Update 20th April 2020

20th April 2020

Monday’s Update: First time since Feb, US stocks record consecutive weekly gains | Economic shutdown poses risk to potentially 59 million jobs in EU

(20/04/2020)

Despite poor data coming to light during last week, which marked the start of earnings season, for the first time since February, US stocks recorded consecutive weekly gains. Hopes that businesses may reopen and the belief that central banks and governments will continue to do what is necessary to stimulate the economy has continued to influence hopeful investors. Evidence of this can be seen in the junk bond market which the FED is supporting. Despite Ford forecasting a $2bn loss in Q1, the company which recently got downgraded to junk status, had debt oversubscribed to as it drew offers of $20bn (initially looking to raise $8bn). This allowed Ford to reduce its offering yield from 11% to approximately 9%. In contrast, during the 2008 crisis Ford were forced to pay 18% on debt, highlighting the influence of aggressive action by the FED.

According to a report from consultancy firm McKinsey, the economic shutdown poses a risk to potentially 59 million jobs in Europe. This translate to approximately a quarter of all private sector employment. The 59 million figure consists of those who will have hours cut, put on temporary furlough or permanently laid off. With such a high figure having a reduced income at best, the argument for economic recovery without continued significant and aggressive stimulus from Central Banks and Governments is weak. Demand drives the economy and although spending is still present during recessionary times, the level needed to boost the economy will be hard to hit with such a large number of people having reduced income and therefore less money to spend.

With footfall diminished to zero during the lockdown, the most vulnerable businesses such as retail stores are being hit hard. Less than half the rent due this month has been received by the owners of open air shopping centres in the US, according to the Financial Times. Retail stores with no online presence are particularly hard hit by lockdown as tenants seek relief from landlords. The longer the lockdown continues, the more significant an impact it will have on businesses, especially those with no online presence. The strength of their balance sheets and the ability to access loans will have a huge say in the survival of many businesses.

To prevent another surge in Non-Performing Loans in banks across the Eurozone, the ECB have held talks regarding the possibility of creating a bad bank to take on the toxic debt of these banks. The aim is to prevent risk from building in banks and therefore effecting their abilities to lend. Lending is of vital importance to help stabilize the economy during this pandemic and will help businesses remain open. In the US, President Trump will allow for the deferral of payments related to tariffs. This move will help to reduce pressures for businesses, some of which have had their revenue has come to a halt. However this move is not comprehensive as $360bn of Chinese imports will still incur the tariff.