Weekly Market Update

Author : Rachel Poole
Date : April 4, 2020

Market Action

Global equities were lower on the week and US Treasuries continued their fall. The US 10-year Treasury note fell 0.18% to 0.58%. The oil sector had a bit of a rally causing the price of a barrel of West Texas Intermediate crude oil to rise $5.50 to $27. The Cboe Volatility Index (VIX) also fell this week, dropping to 49 from 66 last week. Though the markets seemed to take a break from the chaos this week, many economists expect major losses in the coming months as the global economy remains at a standstill and the Covid-19 crisis rages on.

The White House extended national social distancing directives until the end of the month while some states went beyond this to extend their stay-at-home advisories through the beginning of May. New estimates announced by the White House virus task force suggest the deaths attributable to Covid-19 could range between 100,000 and 240,000 in the US.

As a result of the ongoing pandemic, unemployment rates spiked this week. In the US, 6.65 million people filed for unemployment, bringing the total to 10 million submissions over the last two weeks. Similar unemployment statistics are being reported in Europe. Spain reported that 833,000 jobs were lost in March and France announced that 4 million people have applied for wage subsidies.

Once again, the US Federal Reserve took action to support lending to households and businesses. In its latest move, the central bank freed up funding for additional lending by excluding holdings of US Treasuries and deposits from its supplementary leverage ratio. In an attempt to alleviate the demand for dollars which was leading to the sales of Treasuries and other US fixed income securities, the Federal Reserve instituted a new repo facility for foreign central banks. The new facility allows central banks to pledge Treasuries as collateral in exchange for dollar funding which they can then use to lend to local banks.

The coronavirus pandemic has highlighted the North-South divide in European politics. The lack of fiscal union has brought up new challenges for the bloc as Italy and Spain have been absolutely devastated by Covid-19. Northern countries such as Germany and the Netherlands are strongly opposed to the proposal of “coronabonds” which, if issued, would mutualize the debt among all eurozone countries. On the other hand, France has proposed creating a common fund that southern European countries could draw from. This proposal has also been scrutinized by Germany which would prefer to use the existing European Stability Mechanism to support southern European countries.

This week the United Nations (UN) called for 10 percent of global gross domestic product to be devoted to battling the coronavirus pandemic. UN Secretary-General Antonio Guterres warned of heightened instability and conflict as a result of the crisis and encouraged wealthy countries to assist poorer countries. The UN Conference on Trade and Development estimates a 30-40 percent drop in foreign direct investment flows and the International Labor Organization is projecting that 5-25 million jobs will be lost globally due to Covid-19.

Updated Market Figures

What could affect the markets in the weeks ahead?

OPEC+ ministers will meet on Monday to discuss an agreement on crude oil production cuts. The hope for an agreement caused an increase in crude prices this week, but Russia and Saudi Arabia remain at odds over oil production levels. Monday’s meeting will give us a clearer picture as to whether or not the oil price war will continue.

Though the $2 trillion emergency stimulus package, the CARES Act, was passed just last week, members of Congress have begun to draft a phase four relief package. President Trump would like to fund a $2 trillion infrastructure package and Democrats have proposed a variety of environmental projects in addition to a repeal of the cap on the deductibility of state and local taxes. On both sides of the aisle, additional aid to small businesses and local governments is being discussed.