DMU – US Announces Major Financial Package; US and European Stocks Up; Bond Yields Recover; Asian Investors Unconvinced

Contents

USA – Major spending package announced; Fed’s bond-buying begins; Stocks and bond yields up, but prices whipsawing
UK – Exporters benefit from US announcement; UK adds to stimulus and draconian measures; Domestically focused shares continue to fall; Bond yields rose
Continental Europe – Positive reaction to robust measures in US and UK; Ibex 35 recovers most; Bund yields up from record lows
Elsewhere – Investors unconvinced by US measures; Japan’s exporters benefit from less bad exchange rate with US; Australia hammered by falling mineral prices
WTF – Helicopter payments
Links
Numbers
Ts & Cs

USA

Trump finally got with the picture and announced a major spending package to support businesses and households as they cope with the financial fall-out from measures taken to restrict the spread of COVID-19.

Trump’s administration is pushing through an $850 billion stimulus package while also considering helicopter money (see WTF) to the value of $1,000 per household.

The Federal Reserve (US central bank) also kicked off its bond-buying programme which is designed to inject billions of new dollars into the system.

All of these measures cannot reduce the spread of the virus, but they are designed to help folk cope with the lock-down process.

Investors were left pondering what the right value is for stocks and bonds. Measures are being taken to support companies and help some of them stave off potential bankruptcy. But the virus has yet to peak in the US and Europe, both of which appear to be the current centres (never “epicentres”, which is the point ABOVE the central cause of something) of contagion.

Prices are, therefore, “whipsawing” as they say on Wall Street. Flick the end of a long metal saw, and watch it ping back and forth really quickly. Or, do the thing with a ruler on the desk that makes that fantastic noise and really irritates Mr. Kent who sends you out of the classroom until you behave, hypothetically speaking of course.

In other words, stock prices are swinging wildly between massive gains and losses. Yesterday ended up providing gains in the US with the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite adding between 5.2% and 6.2% on the day. These are massive moves, but have become everyday occurrences over recent weeks.

The effects are so broad that it’s a bit pointless giving too many stock specifics. But travel and leisure companies (cruise, restaurant, airlines) are suffering the most while pharmaceutical companies (potential producers of a cure or vaccine for the virus) are doing less badly, sometimes quite well.

Benchmark Treasury (US government bonds) yields also partially recovered as the stimulus package was unveiled (reducing demand for lower-risk rated investments such as bonds, pushing the prices down and yields up). The 10-year Treasury yield had dropped to an all-time low of 0.541% a few days ago. It has juggled its way back up to 1.02% now. But even this is a world away from the 2.5% or higher that it was last summer.

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UK

London’s biggest companies had a reasonable day yesterday. The US stimulus package came in time to lift the FTSE 100 (which is dominated by exporters), leaving it 2.8% higher on the day.

Bojo and Squishy also announced more financial support in the form of something like £300 billion more from the government. That will include a three-month holiday on mortgage payments for people struggling.

However, the reality of the viral spread is one that requires painful action. Hence Bojo and co announced some fairly draconian measures that stop short of lock-down, but not by much. Not visiting public gathering venues such as restaurants, pubs, theatres, sporting venues and the like is going to hammer the finances of those industries, the people who own and work in them, and those that support them.

But what else can you do? It’s a no-win situation for politicians: implement effective measures and you reduce the prevalence of the virus and people complain that you delivered overkill; don’t implement those measures and many people die perhaps avoidably.

While all those companies suffer, quick-witted food retailers are potentially doing OK. Morrisons shares rose by almost 10% after it announced an expansion to its home delivery operation. The question there is getting food processed and delivered to the supermarkets in the first place.

With all this going on, the fears took hold for investors in domestically focused stocks. So the FTSE 250 closed the day 3.0% lower. But, as elsewhere, bond yields rose as the demand for lower-risk rated stuff ebbed. The benchmark 10-year Gilt (UK government bond) yield was at a record low of 0.159% a few days ago, it’s now trading at around 0.554%.

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Continental Europe

Stocks across Continental Europe were reacting positively to the robust financial action being taken by the US in particular. The co-ordinated approach that is necessary, appears to be cranking into action.

The Spanish Ibex 35 was the highest gainer, adding 6.4% on the day. It has been in lock-down for a few days, so folk there are likely to be slightly relieved to see some affirmative action.

The rest of the region’s main stock indices were up by around 3% on the day, while bond yields have also made a sharp rebound. The benchmark 10-year Bund(German government bond) yield was down to -0.856% a couple of days ago, its lowest-ever yield. It’s now around -0.434%.

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Elsewhere

Investors across the Asia Pacific region have been less convinced by US moves. The problems have been compounded by incredibly low mineral prices.

These have hit Australia particularly hard (mineral exports being a major chunk of the country’s economy). Hence the S&P/ASX 200 closed 6.4% lower this morning.

Japan’s stocks were balancing the improved exchange rate of the yen with generally bad news. The higher the dollar, the better for Japanese exporters. So one thing cancelled out another, and the Nikkei 225 closed pretty close to its starting price for the day.

As for the rest, it was down. The major benchmark indices in mainland China, Hong Kong, South Korea, Taiwan and India are down by between 1.8% and 4.9% on the day as I write.

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WTF (What’s The Fact?)

Helicopter payments

These are the extreme form of printing cash. We’re past the days when the Bank of England would physically print more cash because most money only exists electronically.

Instead, we are well and truly in the realms of quantitative easing. That’s where the Bank of England (or any central bank) creates money on its own electronic bank account (the point at which the money is electronically printed) and uses that new money to buy things.

Those things are predominantly low-risk rated bonds that are being held by large financial institutions. By offering loads of money for them, the central bank can provide the institutions with an instant profit (coz the price goes up due to extra demand) and leave them with a pile of cash. The hope is that they’ll use that pile of cash to lend to folk or buy more stuff. In so doing, more money is circulating.

But that takes time to filter through to the common Joe, if it ever does. So the extreme action, which the Fed is considering, is to give every citizen a pot of money to spend. That lifts demand directly as well as helping citizens who are in dire straights.

It’s high risk though, because it creates a long-term skew on the value of money i.e. with loads of money circulating, prices are pushed up. This can create inflationary problems and make other central bank and government financial policies more difficult to implement.

But this is a new situation. The mature financial system has not had a pandemic quite like this to deal with. So, when the devil drives…

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Links

Investopedia – Loads of free explanations of financial terms including some helpful videos. Not 100% accurate, but a good starting point
Guffipedia – Lucy Kellaway of the FT has collected some painful examples of corporate people disappearing up their own analogies
Guardian – Free to access website with a couple of decent columnists (e.g. Nils Pratley and Larry Elliott)
Times of India – Why use five words when 37 will do?
Daily Mail – Click it. I dare you.

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Numbers
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