Risk assets were buoyant globally on Tuesday as the Fed’s latest raft of measures aimed at supporting US credit markets and bolstering the world’s largest economy inspired confidence or, at the least, gave market participants an excuse to shift their mindset to risk-on for a day.
Shares in Tokyo and Seoul surged more than 7% and the dollar took a breather from what’s been a truly epic winning streak, turbocharging the good vibes (dollar strength has been extremely pernicious of late for what it says about the persistence of funding stress and that’s on top of the self-evident fact that a stronger dollar generally leads to tighter financial conditions). The Norwegian krone, which had been in free fall, surged the most ever against the dollar.
“The dollar is weaker across the board as markets respond positively to liquidity measures…with demand for dollars largely sated in the sterling and euro markets, though not yet in yen”, SocGen’s Kit Juckes said. “Equity indices are higher, bond markets calmer”.
Globally, stocks have wiped out ~four years of gains. Another couple of bad sessions and US equities will be below levels seen when Trump was elected.
Total losses across equity markets are around $25 trillion.
But, hey, look at the bright side. History is on your side if your investment horizon is longer than a decade (and if you’re not Japan). “Over a 10-year time horizon, negative returns are rare: outside of the 1930s, the 2000s was the only decade with negative total returns”, BofA notes.
The Kospi rose nearly 9% as the government moved to stabilize markets. It was the largest one-day gain in a decade for beaten-down shares in South Korea, which briefly became the ex-China epicenter for COVID-19, before containment measures quickly flattened the curve and deaths were limited.
US equity futures were limit-up prior to the cash open. With the Fed having placated markets, investors now hope for movement on Capitol Hill, where Nancy Pelosi has floated a $2.5 trillion virus stimulus bill in an apparent bid to influence the negotiations in the Senate. Chuck Schumer is said close to a deal with Steve Mnuchin.
“The world has declared war on COVID-19 [and] this has major implications for markets”, Rabobank’s Michael Every wrote, in a note.
“War and economics have history; before there was economics there was political-economy, and the development of central banking is rooted in war”, he went on to say, adding that “a key lesson is that major wars are staggeringly expensive – this one will be too [and while] fiscal measures so far are huge, they arguably underestimate what is required”.
“When you take a step back and look at what the Fed has done so far (150bp of rate cuts this month, a QE program that started with USD 700 billion in buying but is now unlimited in size, an expanded cross-currency swap program and measures to support commercial paper, money market mutual funds, municipal bonds, investment grade corporate bonds, and MBS), it’s incredible”, SocGen’s Juckes marveled, on Tuesday. “All that’s really lacking is equal Government dynamism”.
On Monday evening, during a combative press briefing, Donald Trump said he called Jerome Powell and praised the Fed for its actions.