LCG: Shares drop again awaiting US stimulus bill

LCG: Shares drop again awaiting US stimulus bill

Equity
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A leap in the global death toll led by Italy from the coronavirus coupled with a failed stimulus vote in the United States saw markets rocked at the start of the week.

India Sensex trading halt

A plunge in Indian stocks by 10% triggered a trading halt.

The curfew of 1.3 billion people boggles the mind and investors in India have been mindful only to sell. Bank shares have been leading the declines on the Sensex. Axis bank shares dropped of 20% as Indian markets kept falling after the trading halt. If the next curfew lasts longer we can expect and even bigger drop in Indian shares. Investors will be pricing in not just an Indian growth slowdown like the IMF has predicted but recession.

US futures limit down after bill fails

US equity futures had gone limit down 5% but are now off the lows.

Democrats want to make their mark on the US economic stimulus plan so a vote failed on Sunday. Stocks dropped on news of the failure but lifted off the lows on news that White House and Congressional leaders continue to talk.

A slew of government spending and central bank liquidity measures last week eased the fear factor last week. The big one this week will be the US coronavirus bill. White House economic advisor Larry Kudlow said over the weekend that the package would be worth $2 trillion.

FTSE under pressure as McDonalds and Primark shut

The FTSE has dropped down to last week’s lows on Monday.

The FTSE 100 established a base at 4850 last Monday but is challenging that level a week on.  Large UK businesses are now taking it upon themselves to shutdown to protect staff and clients. It helps that McDonalds and Primark will pay their staff while not working but the shops being closed will inevitably slow consumption and thus the economy. And the more shops the close, the worse the effect. Perhaps shop closures is a mute point if the government is planning a lockdown except essentials anyway.

The dollar is the king of cash

Dollar demand eased off by the end of the week after a slew of extra Fed measures to provide dollar liquidity. In times like these cash is king and the dollar is king of cash.

EURUSD established a base on Thursday and retested it again on Friday. Most other global currencies saw some respite by the end of the week.

The new swap lines to get dollars to other countries limit the chance of erratic moves that caused the dollar to spike last week. But until some fundamentally changes either in the spread of the virus or the government response then the demand for dollars will still be there.

Pound – dead cat bounce ?

Pound saw a big rebound at the tail end of last week and not just against the dollar. The Bank of England cutting rates down to 0.25% and reintroducing QE offered some reprieve for Sterling.

We think the selling of Sterling has stopped only temporally, even at 35-year lows. People are panic buying leaves shelves empty because they can see the UK looks like it’s headed for lockdown and without a trade deal in sight.

How long can the ‘lockdown + bailouts’ strategy work?

“We cannot let the cure be worse than the problem itself” President Trump.

Trump has based his whole presidency on the economy so his concern about the effect of containment is acute. Behind the scenes, authorities worldwide will be questioning how long people can be expected to self-isolate.

If 30, 60 or even 90 days into ‘social distancing’ the spread of the virus has not be stopped. What happens next? Governments will need to make some tough choices. Trump is characteristically laying his cards out on the table. The choice could be between the death of 1% of the population or an economic depression. Both will be very hard to recover from.

Opening calls

FTSE set to open 266 points lower at 4924

DAX set to open 442 points lower at 8486

S&P 500 to open 96 points lower at 2208