What a difference a day makes… 24 hours on and, despite seeing no agreement from the US on a stimulus package, markets went on an absolute flier, with gains ranging from 5% up to 11%. The FTSE was lifted by 9% – though having fallen 5% on Monday, it’s actual gain on the week is just under 5% on the week so far and has another 25% to go if it wants to try and correct the losses it’s made this month!
The rally was also fuelled by investors being forced to buy stocks as part of their monthly portfolio rebalancing exercise; if your portfolio of £100 was made up of £65 of stocks and £35 of bonds at the start of the month, and the stocks fell in value to say £50, you might have a mandate in place that says you have to sell bonds and buy equities to be back to a 65/35 ratio by the end of the month. If this was responsible for the moves being so big then we might think that this could be a false dawn and that equities might not be out of the woods yet.
That deal that the market was waiting for from the US has actually been passed this morning. The deal clocks in at just over $2trillion in value. The deal helps businesses continue to pay employee wages as well as making direct payments to most US adults of $1,200. We’ll get more details later in the day on this and that will be a welcome distraction of sorts.
Markets have already latched onto the deal and futures are higher in Europe and the US , with Asia already having had a good day. Another area of caution though is that a lot of traders will have ‘bought the rumour’ and could now be looking to ‘sell the fact’ – so another reason we might see things head lower for a while.
We say for a while, because the stock markets heading higher is inevitable. We wrote a lot about the massive rise last year on the back of practically zero company growth and the reason for that was that there was just so much money in the system. well, we’ve just had trillions more dollars dumped into the system and that’s all going to need a home at some point. Once there is an end in sight, people aren’t going to want to be sitting on cash that’s making them zero interest – or even costing them through negative rates – people are going to want yield and a stock market is going to be the (only?) place to go and get it.
There are still plenty of situations that governments need to address and the one massive global employer is the aviation industry. We’re yet to get any government actively coming to the rescue for these (sovereign subsidised flag carriers aside) and this is starting to look pretty desperate. we’ve spoken before about the need for governments to take equity stakes rather than just guarantee bonds and perhaps this is the wrangling that’s taking some time. Boeing’s CFO has said that debt markets are basically closed to new debt issues and that they need credit from the government – emphasising his preference for debt guarantees over giving away equity – and this will be the sticking point…
Airlines know that this is transitory and that if they have enough cash on good enough terms, they can probably ride this out without giving away a piece of the pie, whereas governments will be loath to give them the terms they need (such as long repayment holidays and minimal coupons) without banking the taxpayer some future upside. We wonder who is going to win in this?
Goldman Sachs have told their clients that now is the time to buy gold. The precious metal is seen as the ultimate safe haven and hedge against inflation, but its price was hammered over the last couple of weeks as everyone had to sell positions to release dollars to pay margin calls. Now that that selling wave has stopped, investors will no doubt be piling back into the asset as a hedge against all of this central bank money printing, which should really have some upward impact on inflation in coming months (we say ‘should’ because it really should have had an impact the last time central banks stood by the printing press back in 2008-2015, but it didn’t)
Governments will be very keen to try and get inflation back up towards the 2% target, as the increase in national debt is going to need repaying somehow. If inflation could get to 2% by the end of all of this, then that debt pile could decrease in value terms by about 10% over 5 years, even if the monetary amount remained constant.
That’s all for now.