What happened:
France has announced it is to extend virus lockdown measures until May 11 and the UK was expected to follow suit with an extension to its restrictions later in the week.
Several European economies such as Austria and Denmark have started the process of the gradual easing of measures, while other countries were weighing up the priorities between economic recovery and public health.
The EU is expected to present a blueprint for lifting restrictions next week. It will request member states to coordinate their relaxing of measures or at least give the others advance notice of any planned changes.
In the US, regional coordination of how restrictions are eased is expected such as in the Tristate area or between California and Oregon. There is controversy on the powers of the presidency versus state governors when it comes to this subject, but the constitution seems to err on the side of the states.
Markets were trading up on Tuesday in expectation of US earnings season. This despite Goldman Sachs’ forecasts seeing a 35 percent contraction in advanced economies during the second quarter. Earnings reporting for the financial sector will be kicked off by J. P. Morgan and Wells Fargo on Tuesday followed by Morgan Stanley, Citigroup, BNY Mellon, State Street, Goldman Sachs and Black Rock later in the week.
US Federal Reserve vice chairman, Richard Clarida, erred on the optimistic side on Monday. He told Bloomberg that the US economy had been strong in terms of employment, growth and financial markets going into the coronavirus disease (COVID-19) crisis.
He justified the purchase of high-yield debt in terms of the Fed mainly making secondary market purchases of bonds where companies had been downgraded from investment grade because of the epidemic. He predicted rates to remain low for some time until a recovery was well on its way.
Europe is heading for a double-digit slump in the second quarter, according to a Bloomberg economist survey and will still be down around 5 percent on the year, depending on the shape and speed of the recovery in the second half.
Background:
The enthusiasm ahead of the earnings season may be overly optimistic.
It will be difficult to use usual benchmarks, such as earnings per share, particularly for banks. Expect investors to focus on loans loss provisions as a measure of how well banks will be able to handle a declining economy.
Trading activity has spiked for financial institutions with capital market operations due to the crisis-induced uncertainty and heightened volatility. The effect on earnings of traders operating from their home office is unknown as of yet.
It will be difficult to focus too much on guidance, as many of the S&P 500 companies have made downward adjustments. A look at the effects of shutdown on individual companies and their supply chains will be necessary.
Trade serves as a good benchmark when evaluating global recessions. It was down 10 percent during the 2008 financial crisis and 50 percent after the Great Depression.
World Trade Organization numbers suggest declines of 32 percent for the second quarter of this year and 13 percent by the end of the year, the problem being that the long-term ramifications of the COVID-19 crisis on supply chains is as yet unknown. This makes the direction of travel over the next few years difficult to predict.
Where we go from here:
Earnings season may not give the best glimpse, as the shutdown only affected many companies during March. We are in truly unchartered territory and investors need to figure out how to assess the earnings potentials going forward.
This will vary according to the shape and speed of any economic recovery. There will be no one size fits all as sectors and companies are affected differently by the crisis and any recovery.
Another question will be, what will companies do with their share buyback and dividend programs?
Banks and companies receiving government support are under pressure to cancel share buybacks and cancel or postpone dividends. European banks were the first to announce such measures and it is expected that many companies will yield to pressure and sentiment globally.
In a low-interest-rate environment, yield will be king for many institutional investors.
Later on Tuesday, the International Monetary Fund will release its latest forecasts, which are expected to be very pessimistic. Its data will influence market sentiment and will be the subject for tomorrow’s Coronanomics.
— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.
Twitter: @MeyerResources
