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Interviews and in-depth reports on the people, enterprises, and markets that are shaping the future.

April 10, 2020
  • The market needs to build a technical base with enough liquidity to restart price discovery in order to come to terms with the sudden recession. 
  • Market analysts must also calibrate the scale and duration of demand shock, which could potentially be a 25% to 35% quarterly decline in GDP in the second quarter of 2020.
  • A major unknown at the moment, as supply chains and normal workforce habits remain disrupted, is the impact of COVID-19 on the supply side and the productive potential of the global economy post-crisis.

The economic impact of the global coronavirus pandemic can be seen from many angles, but one that is the direct result of the last global crisis—the 2008 global financial crisis—is the role excessive liquidity has played in the markets.

The over-leveraged banks that caused the financial crisis began the last decade with messy, overwhelmed balance sheets. As regulations locked the banking sector out of lending, and central banks cut interest rates and bought up government and corporate bonds, many of the same macro pre-crisis problems with banks were transferred to the corporate sector. In fact, before COVID-19 hit, corporate balance sheets were at levels higher than the sector saw in the years before the 2008 crash. More and more money went into capital markets, with tax cuts in the U.S. and EU adding to the liquidity sloshing around the markets. 

Amid this free-for-all environment, investors continued to drive up asset prices and ride them to incredible heights, only to have all of those gains wiped out by the coronavirus over the last several weeks. So, what happens now? 

First, we need to fully gauge the scale of the recession and its disruption. We might be in unchartered territory, but the questions we need to ask—can we get back to a more sustainable growth path? How big of a risk is inflation? What does this disruption mean for productivity?—are familiar ones. The future is full of unknowns both practical and philosophical, and our analysis will continue to explore the possible scenarios to come once we are on the other side of COVID-19.

Structured products can play a pivotal role in volatile markets like the one we are experiencing now. In looking ahead to the sectors pegged for growth both during and after the crisis, a number of companies may be attractive for investors, such as retailers of consumer staples. Between the ongoing demand for staples as people remain in lockdown and the likelihood of more cautious buying patterns once those restrictions are lifted, this sector is a relatively stable one, and two of the three retailers we’ve chosen have out-performed the S&P 500 since the beginning of 2020. Feel free to reach out if you want to obtain more details.

The EU’s next move

Strong solidarity among Eurozone nations will be critical to the region’s successful rebound from coronavirus market volatility. The ongoing debate over “coronabonds”—the pandemic version of “eurobonds,” which were discussed for the Greek bailout crisis and Spanish bank failures—will give insight into the post-crisis balance of power in the EU. 

Meanwhile, a €500 billion fund speedily launched by the European Central Bank, along with individual country responses, may help corporations in the Eurozone stay afloat longer. With Italy being the first Western country to be hit by the virus, the EU markets dropped steeply; but because the peak occurred earlier than in the U.S. and Canada, investor confidence, particularly in equity markets, seems likely to rebound.

  • The IMF will release its world economic outlook for April 2020 on Tuesday, April 14. This will be the first to fully encompass the global impact of the coronavirus.  
  • On April 15, the U.S. government will release two key data sets on the economic impact of the coronavirus: the March 2020 data on advance sales for food and retail, and the Q1 2020 data on new business formation. Both numbers are projected to be down from the same time last year.

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