Stock markets rallied some 15% this week in response to a strong $2 trillion US fiscal package, equivalent to some 10% of GDP, which was approved in the US Senate. However, it is likely that month-end rebalancing played a significant role in the rally this week.
The US fiscal package should be passed in the House today (Friday) although there may be a procedural delay caused by one representative who, for now at least, seems to be calling for a floor vote.
Overall, it looks like things are falling in place for a sustained rally but on balance markets might not be there yet. Turning to the ‘old’ checklist of things to follow:
Central banks had to do whatever it takes to ensure that markets have enough liquidity and it looks like both the Fed and the ECB have now done this. On Wednesday, the ECB published the details of its emergency asset-purchase program. Looking at the details, it is hard to overstate how significant the measures introduced are – this package gives the ECB almost unlimited powers to buy whatever fixed income it wants, from whoever it wants. It is a clear sign of how serious policy makers are taking the threats from the virus that the ECB Governing Council was able to agree on such a package. Equally, in the US the Federal Reserve has taken unprecedented steps in recent weeks to cushion the US economy from the effects of the expanding pandemic. If investors had one more request of the Fed it would be that it looks at the market for non-agency mortgage backed securities as well but policy makers are smart enough to figure this out.
Fiscal policy needed to be substantial. As mentioned earlier, the US is on the verge of passing a major fiscal package which covers a range of items. In Europe there have been major fiscal measures passed in record time too so governments across Europe – yes, even Germany – get high marks for their response.
Anything to do with the actual cause of the market turmoil – namely the virus – had to improve. It is on this point where investors are not yet out of the woods. There are still too many healthcare professionals who do not appear to have all the equipment they need, and markets still do not yet know if the hospitals in the western world can cope with any increase in patient numbers over the next few weeks. These fears could last for a few more weeks but it seems like the lock-downs will do their job and it would be surprising if there are still really bad headlines regarding overrun healthcare in a couple of weeks from now.
As of Friday morning, Italy had its fourth consecutive day where the rate of change in new infections came in below 10% and France was at 15% - not great but not a disaster. Based on comments from a professor at Imperial University, the healthcare system in the UK will cope – just – but the US is still a concern though.
So, this leaves investors with the million dollar question: when and how can everyone all go back to work and get the economy moving again and how soon?
Trump is pushing for 12th April and if that were to actually happen and virus cases did not rise significantly, this would be very constructive for markets. At this stage, most investors are not as optimistic as Trump. More likely is that by 12th April, the West will only be over the hump in the healthcare system.