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The Economic and Market Disruptions of COVID-19

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As the COVID-19 Black Swan pandemic continues to hit global markets, disrupt trade lines and wreck destruction wherever it goes, we wanted to take a closer examination of the economic and market forecasts that are coming in from investment banking analysts and official government data.

Whilst we do not wish to ignore the fast rising global death toll, some solace can be gained from the fact that most of the 170,000 patients have recovered and been discharged.

But another worry building in peoples minds are those over global markets, their native economy and ultimately, jobs.

Global Markets

Yesterday the Federal Reserve slashed interest rates to 0% and announced the implementation of QE5. As soon as the market opened, trading was once again halted at its ‘limit down’.

Michael Wilson, chief U.S. equity strategist of Morgan Stanley believes that the bottom of the market is close and that it is strongly oversold saying “we are now trading slightly below our downside case on the S&P 500 and believe it is time to start adding to equity risk for longer term investors.”

However David Kostin of Goldman Sachs countered that approach noting “the combination of thin liquidity, high uncertainty, and positioning” could push the S&P down 26% to 2,000” and that “the coronavirus has created unprecedented financial and societal disruption,” he wrote, adding that second-quarter earnings per share could be slashed by 15% from the prior year.

But Goldman is also prepared for the eventuality of the $SPX hitting 1700.

The Economy

Yesterday the Financial Services Forum announced the suspension of share buybacks to help SME liquidity in the United States -“The decision on buybacks is consistent with our collective objective to use our significant capital and liquidity to provide maximum support to individuals, small businesses, and the broader economy through lending and other important services,”

The US economy could shrink by 2% in the first quarter and 3% in the second, JPMorgan projected, while the eurozone economy could contract by 1.8% and 3.3% in the same periods.

Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING thinks that “Lower policy rates alone can clearly only do so much to restore confidence. The focus today therefore switches to governments. Given the scale of the expected contraction in the second quarter – our team sees the US contracting 8% quarter-on-quarter annualised, as bad as the fourth quarter of 2008“.

There has been some hope running through the news cycle in the past few days that China has been able to gain control of the virus, with state media tweeting this;

But there is a good reason to believe that they were trying to draw attention away from their official economic statistics, which came out earlier today;

Alongside those numbers from the SCMP, Fixed Asset Investment plunged 24.5% YTD YoY – the first annual drop and more than twelve times worse than the expected 2.% contraction and Property Investment dropped 16.3% YTD YoY, with the Surveyed Jobless Rate exploding to a record 6.2%.

Jobs

The impact on society and jobs across the world has been profound.

The hashtags #stayathome and #homeoffice are currently trending on the Twittersphere. Even Arnold Schwarzenegger released a video of him feeding his pets in solidarity, which we hope some find therapeutic.

However, for those of us who do not possess $400 million as Arnold does, the implications for a deep recession can be catastrophic.

The United States current unemployment rate is at rock bottom, at just 3.5%. At the end of the last business cycle in 2009, the figure in New York rose to 7.2%.

And whilst many may have the ability to work from home, thoughts must be given to those that are unable to. Everyday that bars, restaurants, cafes, theatres and events stop operating, is another black hole on a balance sheet.

If China is any judge to go by, the impact will be felt for months.