18 Mar 2020
The number of new daily cases in China continues to be in the low double digits with the government now considering immigration restrictions to stem the flow of the virus coming from outside the country. The total number of cases outside mainland China has now exceeded those reported within China. South Korea has also shown a very positive response to the virus with only 74 new cases and a fatality rate of less than 1% highlighting the value of increased testing. While the situation continues to improve in China and other parts of Asia, Europe and North America have begun enacting more extensive measures in an attempt to slow the spread of the virus and ‘flatten the curve’.
The rate of new cases being reported continues to increase rapidly in the rest of the world – Italy +3,233; Spain +1,440; France +1,210; Germany +1,111; USA +428. France and Spain have followed Italy’s lead and announced a full lockdown, while the EU’s borders are closed for the next 30 days. Canada has shut its borders to all foreign nationals except US citizens and permanent residents and has urged people to stay at home. In the US, President Trump’s press conference today acknowledged the severity of the situation urging people to stay at home and recommending against any social gatherings of more than 10 people. New York, Illinois, Washington, Massachusetts, Ohio and Louisiana have announced closures of all bars and restaurants in response to the virus.
We are seeing significant response from both governments and central banks to provide stimulus, liquidity and support for the economy. Markets, however, have not responded positively thus far. Recent data out of China has fallen significantly short of expectations with retail sales and industrial production falling -20.5% and 13.5% relative to expectations of -4% and -3% respectively. That said, initial indications suggest that China is gradually reverting to normality with daily indicators of coal consumption, passenger volume and property transactions all seeing modest improvements. This slower pace of normalization has been driven by several constraints, including shortage of labor as migrant workers have not yet returned to their place of work, and companies not having the required equipment such as masks.
The Fed’s emergency rate cut of 100bps and announcement of a $700bn of bond purchase program failed to reassure the market with the S&P500 opening limit down for the 3rd time in 6 sessions. We have now seen the fastest drawdown of greater than 25% from its peak in US equity history. US equities ended the day down 12%, the worst single day move since 1987 and wiping out all gains from 2019. The Russell 2000 index also had its worst day in history down 14% and equities are now down 30% from the all-time highs seen less than a month ago, noting that 30% is the average drawdown for recessionary declines. Commodities declined as well with oil down (Brent -12%, WTI -10%) and copper down 3% to its lowest level since 2016. In spite of the Fed’s actions, there are still concerns surrounding liquidity with IG spreads up from 107bps to 124bps and HY spreads up to 673bps, though both are slightly short of the highs we saw at the end of last week.
Finally, US rates closed the day down across the curve, with the US10Y Treasury at 0.72% and the US30Y Treasury at 1.28%. In contrast, 10Y German Bunds were up 9bps and are now at -46bps.
Last night, President Macron announced that France will guarantee up to €300bn of bank loans to companies in an effort to bolster firms threatened by the impact of the COVID-19 outbreak. The government will also allow companies to delay paying their taxes and social security contributions and provide support to help them delay loan payments.
In Germany, the government announced liquidity support for companies through tax deferrals. Additionally, they expanded the existing guarantee schemes provided through the state-owned KfW bank to a larger number of firms and the share of risk covered by the public budget increased to 70-80% (up from 50%). The public guarantee for KfW has been increased to €553bn (16% of GDP) from €440bn.
In Italy, the government announced a fiscal stimulus package up to €25bn which among other benefits for the general public, provides compensation for 60% of firms’ property rental costs and guarantees for SME loans. Additionally, the Cassa Depositi e Prestiti SpA (Italian investment bank) is to offer liquidity assistance to companies.
In the US, we await further developments on the Families First Bill and the relief measures for small businesses
Lastly, in the UK, the Chancellor is expected to make an announcement today on extending the measures to assist households and businesses from those set out in the Budget last week. As a reminder, in the Budget, the government announced £7bn in measures to assist households and businesses through a range of measures which include an extension of statutory sick pay, temporary relaxation of the minimum income floor in Universal Credit, business tax reliefs as well as a temporary Coronavirus Business Interruption Loan Scheme that offers government debt guarantees and deferred tax payments. £18bn has been set aside for longer term measures to be implemented later in the year
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