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Bloodbath Monday

Asian markets embrace another bloodbath day as US index futures hit 5% ‘limit down’ triggering circuit breakers shortly after open. Crude oil prices tumbled around 6%.

This sent a clear signal to investors that the selling is not ending yet as markets wait for a massive fiscal plan to be agreed in the White House.

The stock market turmoil is increasingly becoming a ‘liquidity crisis’ as the spill over effect of massive unwinding of leveraged positions start to erode other markets; triggering a broader selloff in global equities, bonds and even forex positions. This might worsen the credit profile for corporates and dampen investment sentiment as individuals become less wealthy. The negative spiral of a stock market meltdown is compounded with the real economic damage brought on by Covid-19.

According to the latest forecast by IHS Markit, the US economy is expected to plunge by 13% in the second quarter and its full year GDP to contract by 1.7%. This marks a drastic revision down from its previous forecast of a 5.4% contraction in the second quarter, due to the rapid development of Covid-19 and the resulting lockdown in key areas of the US. 

Over the weekend, the Singapore government has also announced stricter border controls to limit all short-term travellers to enter the city-state, due to the increasing number of imported cases lately.  

We may eventually see light at the end of the tunnel, but the darkest moments will come first. Given enormous uncertainty surrounding the developments of Covid-19 (especially the duration) in North America and Western Europe, it is hard to say when we will reach a bottom in the near term.

We might need to see a complete lockdown in the US - a necessary effort to contain the spread of the virus at the expense of short-term economic pain - before confidence can be restored.

As corporate earnings in a broad range of sectors (namely aviation, retail, auto, F&B, service in general) are likely to get hammered sharply in the months to come, corporates’ credit profiles will deteriorate. Will this trigger a massive deleveraging cycle in the credit market? Then we will have a much bigger problem to deal with.   

US SPX 500 – Cash (5 min) chart

 

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