May Monthly
Aggressive action by several central banks and governments helped reduce the extreme tail risk that had seemed so dominant in the second half of March. Strains in the funding markets eased, and equity markets recouped some of the steep losses inflicted during the frenzied panic. To be sure, most major economies were largely shut down in April, and the lagging economic data is dreadful.....MUCH MORE
It was only in the second half of April that some social distancing was lifted in some places in Asia, Europe, and the US. China's data showed that the economy contracted by nearly 10% in the first quarter but did show the pace moderated in March. Still, China's experience suggests that even after the shutdown is lifted, people's consumption patterns, like patronizing restaurants, have not recovered much, as people do not feel safe yet.
Various measures of the contagion showed signs of peaking in the major economies, and in the coming weeks, more shutdowns are expected to be lifted. Economies are likely to be bottoming in next month or so. There has been much debate about whether the recovery will be characterized by an L, U, V, or W. At his press conference following the recent FOMC meeting, Federal Reserve Chairman Powell said he was more pessimistic than the "W" camp.
Much depends on the course of the virus, which remains a significant unknown. Will the easing of the shutdowns see a new surge in the virus? Do antibodies give one immunity, and, if so, for how long? While national closures are unlikely to be re-imposed, localized restrictions on movement, as some countries have re-introduced, seem a more reasonable response to new outbreaks.
At first, the re-openings are likely to be slow and tentative, and activity is unlikely to explode higher immediately. Large social gatherings, including the use of mass transportation and the like, may take some time to re-build, especially in the absence of a vaccine or effective treatment. The extended supply chains and the desynchronized nature of the epidemic will also complicate economic recoveries. However, the math behind GDP and the change in the change, as it were, does set the stage a strong rebound later this year.
The stresses in the capital markets eased considerably in April. They remain on life-support provided by central banks stepping up as lenders-of-last resort. In addition to bond markets, several central banks also supported the short-term corporate bill market and offered guarantees on bank loans.
The Federal Reserve indicated that corporate bonds that had recently lost their investment-grade status ("fallen angels") would be included in its support to the sector. It also announced that within specific valuation parameters, it could buy high-yielding bond ETFs. The ECB has issued a waiver that allowed it to buy Greek bonds, which are rated below investment-grade. It took another step and indicated it would accept "fallen angel" bonds as collateral for loans from the central bank.
The funding markets have gradually begun normalizing. LIBOR is on a clear downtrend, as is Euribor. As stability returned to the capital markets, several central banks, including the Federal Reserve, the Reserve Bank of Australia and the Reserve Bank of New Zealand began scaling back their bond purchases....
