Covid-19: Fiscal and monetary policy implications III

Since our last post, a lot has happened in markets. Ranging from an unprecedented massive fiscal stimulus package signed by President Trump and a subsequent +20% rally in the SP500 leading to stabilising markets in a matter of just 8 days.

VVIX (volatility of volatility*) has gradually fallen from a peak of 207.59 to a current level of 154.28. 

The ViX has fallen from a peak of 84.83 to a current level of approximately 51.02

The drops in volatility coincided with the passing of the massive fiscal stimulus package, as well as the emergency rate cut on Sunday 15th of March, a day before markets opened.

Currently massive QE, 0% interest rates and massive fiscal stimulus are propping up equity markets. Furthermore, several investmentbanks have turned bullish on equities last week, suggesting that a bottom is forming.

Time to buy stocks again, market mavens say

Last week we saw a whooping increase in initial jobless claims, suggesting an increase in unemployment benefits being claimed, with fresh data scheduled to be released on Thursday along with non-farm payrolls on Friday.

We at East Invest believe that we have approached a change in market dynamics, leading to the so-called "bad news is good news", which manifested itself via markets going up last Thursday (SP500 +6.24%), despite a severe deterioration in in the initial jobless claims data. 

From here on we believe that any further deterioration in economic data will lead to propelled and sustained increases in equity prices, due to the likelihood of increased market expectations of additional monetary and fiscal policy as economic data deteriorates. 

Providing historical context for this phenomenon, can be seen post-2008, with the Dow Jones rallying a whooping 98% as unemployment rose simultaneously.

It is also important to note that policymakers were swifter in their response to combat the Coronavirus crisis than during 2008. As interest rates were gradually decreased rather than on swifter basis as they were now, and that recent policy-actions being more coordinated and implemented in tandem comparing 2008.


Among other things, China is set to lift its strict quarantine measures put in place, at the beginning of April.

China to Lift Lockdown Over Virus Epicenter Wuhan on April 8 

Fresh PMI-data out of China states a sharp rise in PMI, increasing optimism of economic recovery, despite the quarantine measures put in place.

China factory activity unexpectedly expands, but economy cannot shake off virus shock

While this is cautious optimism, we at East Invest believe this is a firm sign that the underlying economy is indeed strengthening in China, and with loosening quarantine restrictions at the beginning of April, economic activity will return to ordinary pre-Coronavirus levels, and that Europe and the U.S. is 1-2 months away in a similar trajectory.

The amount of novel Coronavirus cases seems to have peaked over the weekend, suggesting that the quarantine-measures around the globe are having a quick effect on a previously escalating pandemic.

Concern has been raised surrounding additional surges of the Coronavirus, when quarantine measures are set to loosen in China (and other geographies eventually). While we believe this to be a valid concern, it is important to take into account that we are more prepared now, than prior to the outbreak, and that loose monetary and fiscal policy is set to outweigh the deleterious effects of increased surges in novel Coronavirus cases in the future.

Currently new talks of additional stimulus packages are underway, as doubts have been risen if the current ones are enough in order to stave off the detrimental effects of the Coronavirus, suggesting that the negative demand-shock of the novel Coronavirus is set to be buoyed by ample liquidity. 

U.S. stimulus package is biggest ever, but may not be big enough

In our previous post we mentioned that the oil-sector has taken a tremendous beating due to the demand-shock in the wake of the Coronavirus pandemic and the ample supply of crude oil due to the Saudi-Russian oil-price war. Goldman Sachs in a fresh report states;

"Consumption will drop by 26 million barrels, or 25%, this week as social-distancing measures to contain the coronavirus now impact 92% of global GDP, analysts including Jeff Currie and Damien Courvalin said in a note. There’s been at least 900,000 barrels a day of announced shut-ins at the wellhead, with the true number likely higher and growing by the hour, they said"

A whooping 92% of world GDP is currently under lockdown, leaving marginal room for further lockdowns, and if additional lockdowns were to be implemented, these would be of marginal significance in light of current monetary and fiscal policy.

Therefore, we at East Invest believe that markets have already priced in the full-scale negative effects of the Coronavirus and that the future is likely to result in a rubber-band effect, manifested by lifting quarantine-restrictions and a return to ordinary economic activity.

Oil-markets are set to return to a new price-equilibria, when lockdowns are lifted, resulting an increase in demand. However, the current oil-war between Russia and Saudi Arabia, is likely to hinder the advance to previous oil-price levels, with us seeing a crude-oil price of 40$ in the next 6-8 months.

We therefore, believe that the savvy investor can find cheap bargains in companies that are set to weather this crisis in the oil-sector that has underperformed the most relative to other sectors of the SP500.

Important to note is to pick companies with strong balance-sheets and low corporate debt levels, as current oil-prices are set to bankrupt producers with high breakeven-oil prices. 

Overall we are bullish on equities, across all sectors, and short the US-dollar as well as bullish on emerging market currencies.