People usually say the market -- and by extension, the investor -- has the memory of a goldfish. This has always been the case, as no matter what crashes or recessions appeared in the past, the investor soon forgets about the pain after the market rallies back over the next few months. Lessons will never be learnt in terms of leverage in the system or the regulation or policies that need to be put in place to protect such an outcome again. The end justifies the means. And so, the central banks "print" to ease away any problem and to answer to any ailment -- even a viral infectious flu, it seems.
After we saw markets fall 8% in just one week, marked to market intraday of an additional 3.5% Friday open, (fastest pace ever in history of U.S. markets, including Black Monday), with the overall market down 13%, central banks have been nudged. As global markets have breached their key 200-day moving averages and with uptrends being tested, there are rumours of globally coordinated central bank easing, similar to the global efforts back in 2015/2016 after the Chinese yuan devaluation that crumbled emerging markets.
On Monday morning, Bank of Japan Governor, Haruhiko Kuroda eased investors' minds by issuing a statement declaring that the central bank "will drive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases". The BOJ said it would buy 500 billion yen worth of government bonds, it's first such operation since 2016. This comes on top of the 80 trillion yen a year of JGBs they have continued to buy, along with buying exchange-traded funds at a pace of 6 trillion a year.
Boom! And there you have it, the end of free market capitalism.
On Friday afternoon, Fed Powell issued a statement saying that the Federal Reserve is "closely monitoring" developments and "will use [its] tools and act as needed to support the economy". Given Powell's track record of drastic u-turns all of 2018 and 2019, there were whispers that they would announce a rate cut or two possibly prior to their actual FOMC meeting on the March 18. Now, Goldman Sachs has thrown in the towel on its wildly optimistic outlook since late 2019 -- and instead of seeing no rate cuts or possibly even a rate hike, it has capitulated on its call and says it expect the Fed to cut at least three times in the first half of 2020, due to the coronavirus slowdown.
This has all been followed by coordinated central bank action. As I write this, Bank of Indonesia has cut the rupiah reserve requirement ratio (RRR) by 50 bps to 4% for banks and Malaysia is due to cut tomorrow as well.
Brent oil went briefly below $50/bbl, and on Monday morning Russia is making comments about how they will do what it takes to support their economy. They are still to decide on OPEC's pledge of cutting another 1mln bpd of oil as they head into the OPEC meeting on March 5. Suppose Brent below $50/bbl, will make them ready to play ball. Even U.S. Shale sub $45/bbl WTI is going bankrupt -- at least those that have not done so already.
It is remarkable to see such unanimity in the world at times like this. One wishes it is for all aspects of life, rather than just the financial system. No country or central bank can afford a higher dollar, collapsing financial system and bond market in total chaos. The fact of the matter is we cannot live in a world of higher interest rates, ever. The fact that the U.S. Fed is starting to ease from a balance sheet of $4.18 trillion and rates at 1.75% implies they have less firepower today than back in 2008.
Needless to say, this will support the economy -- oops sorry the market, as we all know the market is not the economy, but that is all that matters in terms of economic growth.
Things never go down or up in a straight line. As of Monday morning, a total of 25 out of 31 provincial-level regions in mainland China reported 0 new cases of coronavirus on Sunday, according to the National Health Commission. So, the rate of spread in China is plateauing. Of course, as China is stabilizing, given it takes time for the infection to show up in other parts of the world, from January, it now appears to be peaking in the rest of the world as people are panicking about South Korea, Italy, Iran, Europe, and even the U.S.
Last week was the utter doom and gloom of news flow and pandemic alerts with prophesies of Nostradamus wannabes calling the end of the world and civilization as we know it. These next few weeks are critical, as if cases subside, then we may have very well seen the worst of this viral flu spread. Factories and businesses are slowly returning to work in China, and have been given some of the best incentives by the State than ever before.
One thing is for certain, the amount of liquidity being pumped by China and the rest of the world, an all-out Hail Mary, can only mean one thing. When the virus stabilizes or is contained, equities, commodities and China-sensitive names are all set to fire upwards like a rocket.
