After a week of utter carnage European markets have opened higher this morning after the US Federal Reserve injected trillions of US dollars into the treasury market in order to improve liquidity, and Spanish and Italian regulators imposed short selling bans on certain stocks and sectors.
While today’s positive start is welcome it still pales into insignificance when set against this week’s declines. Let’s not forget the FTSE100 close at 6,462 at the end of last week.
The reality is that even with widespread fiscal measures the economic damage of the virus cannot be avoided, it can only be mitigated, which means investors need to adapt to the reality that there will be economic damage whatever happens now. The only unknown remains how much damage, and how well any fiscal response mitigates it.
It is this uncertainty that makes it so difficult for markets to determine where a possible base might be.
Today’s early gainers are in the basic resource sector, some of this week’s biggest losers including Rio Tinto and BHP Billiton, which appear to be reaping the benefit of a big surge in Australian stock markets, and which saw the ASX 200 close up 4.42%.
Travel stocks are still under pressure with Carnival Cruise Lines sharply lower after yesterday’s announcement that the company is suspending its Princess Cruises for two months.
Airline stocks aren’t getting a respite either ahead of a possible decision by the European Commission to waive the requirement that European carriers use at least 80% of their slot capacity at airports or risk losing them.
With the airline sector under such pressure given the size of their fixed costs, and Norwegian’s decision yesterday to cut half its work force, it does beg the question why the EU is dragging its feet over this.
The lack of a rebound in the travel and leisure sector does call into question the sustainability of today’s recovery, and suggests that we may well not have found a base quite yet.
BT Group shares are also higher despite CEO Philip Jansen testing positive for COVID-19.
The US dollar has slid back after yesterday’s big surge, while the euro has stabilised after ECB President Christine Lagarde’s little faux pas over Italian bond spreads. This was always a concern when you put a politician in the top job of one of the world’s biggest central banks. Someone like Mario Draghi or Janet Yellen would not have made such an error.
That being said Ms Lagarde was correct in identifying, as Mario Draghi consistently did during his tenure, that politicians needed to do much more to complement the measures being taken by the central bank.
Some have criticised the ECB’s decision not to cut rates, however given the weakness of the European banking sector over the past few years, it’s a welcome recognition of how damaging that particular policy has been.
Italian banks are down 50% in the last month, and Germany’s largest bank, Deutsche Bank shares have again today hit new record lows. The reality is the ECB can only do so much and politicians across Europe need to do more or face an unwelcome reckoning.
US markets look set to open higher in the wake of the more positive tone in Europe this morning though given the volatility seen this week that could well change in the next few hours, as markets oscillate to and fro.
There is an expectation that the Federal Reserve may well act further on rates, when they meet next week, as well as embarking on further money market operations to keep Treasury markets functioning. Yields this week have jumped sharply from their Monday lows, which is hugely counterintuitive in a week that has seen massive falls in stock markets.