What happened:
Chair of the Federal Reserve Jerome Powell painted a grim picture when he spoke at the Peterson Institute for International Economics on Wednesday. Powell expressed fear that economic recovery would take time. The danger of liquidity problems turning into solvency problems was of particular concern. Powell emphasized the need for additional fiscal support, admitting that it could be costly but that it would be worth it if it helped avert long-term damage to the economy and led to a stronger recovery.
Powell said that the Federal Open Market Committee was not considering negative interest rates at this point, and that he was satisfied with the Federal Reserve’s current toolkit for now.
This did not stop bond traders from betting on negative rates in early 2021.
US Secretary of the Treasury Steven Mnuchin tried to assuage investors after Powell’s comments, hoping that a dramatic downturn could be followed by a steep recovery.
This is not the view of veteran investor and Appaloosa founder David Tapper, however, who considered stock markets to be at their most overvalued since 1999.
Goldman Sachs said that the US economy could contract by as much as 39 percent and that unemployment could rise to 25 percent in the second quarter. However, the investment bank is optimistic about a steep recovery, forecasting unemployment at 10 percent at the end of the year.
A UN study predicted that the global economy could contract by 3.2 percent this year, in contrast to the International Monetary Fund (IMF) forecast of – 3 percent. The crisis could wipe out growth for four years, with the loss amounting to $8.5 trillion. The pandemic could also push 130 million people into poverty.
WHO Chief Scientist Soumya Swaminathan said it could take four to five years before the coronavirus (COVID-19) pandemic is under control.
Italy’s government passed its delayed €55 billion ($59 billion) stimulus package. In the US, the Democrat-controlled House of Representatives passed a $3 trillion package focusing on state and local governments, essential workers and money transfers to individuals. Republicans are not in favor of the current package.
Earnings Season:
Tencent first quarter revenues came in at yuan 108 billion ($15 billion), up by 26 percent, beating expectations. Online gaming surged by 31 percent. Profits were yuan 28.9 billion, up 6 percent.
Cisco Systems third quarter earnings came in at $12 billion, down by 8 percent. Net income was $2.8 billion, down 9 percent. The company experienced supply constraints due to the pandemic, but still beat expectations.
Zurich reported premiums at $9.7 billion, up by 5 percent. The Swiss solvency test stood at 186 percent. The company said there was little visibility for future COVID-19 related claims. They were at $280 million in the first quarter but could amount to $750 million for the full year.
Deutsche Telecoms earnings came in at €19.9 billion, up 2.3 percent. Adjusted net profit came in at €8.5 billion, up 8.5 percent year on year.
Background:
The COVID-19 crisis has underlined the safe haven status of the US dollar. The question is how long the dollar strength will continue. While the dollar may fluctuate some, it will remain strong because it still is the world’s reserve currency. This holds true particularly when viewed against emerging market currencies.
According to a survey by the Bank of International Settlement, dollars amounted to 88 percent of all currency trades, and dollar credits extended to borrowers outside the US, excluding banks, climbed to $12.2 trillion by last December. According to the IMF, the dollar accounts for 61 percent of global foreign currency reserves. The greenback also had a share of 44 percent of all payments over SWIFT.
These are big numbers explaining the status of the dollar. President and CEO of the Federal Reserve Bank of St. Louis James Bullard expects dollar dominance to continue for some time. He thinks that other currencies are in no position to challenge the dollar’s position. As long as this holds true, investors will flock to the dollar particularly in times of crisis.
The Chinese yuan has gained prominence over the last decade, particularly since the country started to price imports of commodities in yuan. Still, as long as China does not liberalize capital movements, the yuan cannot assume a truly global position.
That being said, the yuan’s relative stability had a positive effect on emerging market currencies in neighboring Asia when compared to their peers elsewhere.
Powell’s comments against negative interest rates further support dollar strength. Even if Federal Reserve rates turned negative, the Japanese yen and the Swiss franc have shown that investors will flock back to safe havens irrespective of negative rates.
Where we go from here:
The EU has extended new non-binding guidelines for opening borders, favoring a collective approach rather than countries reacting in clusters.
Germany, Austria, Switzerland and France are taking a phased approach to open their borders to each other. This is important as tourism accounts for an average 11 percent of GDP in Europe. This number goes up to 20 percent in certain southern rim countries and 15 percent in Austria. Tourism employs 27 million workers in Europe.
The International Energy Agency’s monthly oil report states that oil markets are improving amid production cuts and slowly rising consumption.
— 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
