Mar 17, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙"No problem can be solved from the same level of consciousness that created it."- See who said it and why it matters at the bottom.

1 big thing: The looming global great recession

GDP data: OECD, BoA Global Research; Coronavirus data: The Center for Systems Science and Engineering at Johns Hopkins; Chart: Andrew Witherspoon/Axios

Economists have removed their rose-colored glasses in recent weeks and are beginning to price in scenarios for the world that are as bad or much worse than the 2007–2009 global financial crisis.

State of play: "If you think about the situation going into the financial crisis, I would say all things being equal there was clearly a better ability to react economically … in Europe and in Japan and also in the U.S.," Thomas Holzheu, Americas chief economist at reinsurance giant Swiss Re, tells Axios.

  • "Since we see that the global economy is not in a very resilient situation in terms of the ability to organize and muster a very strong policy response, we expect that the recovery will not happen very quickly."

The big picture: The U.S., the world's biggest economy, is likely to have a recession this year and the No. 2 economy, China, has already undergone a significant slowdown.

  • That alone would have been enough to weigh on global growth, but because major economies like Italy, Germany, the U.K., France and Japan also are facing major outbreaks of their own, there is growing fear of the entire world's GDP growth turning negative for multiple quarters this year.
  • As of Monday night, 15 countries had at least 1,000 confirmed cases of COVID-19, and 12 of those were among the world's 25 largest economies.

Worse, many of the countries expected to be hardest hit by the outbreak are in some of the weakest economic positions, especially those in the eurozone.

  • EU regulations have handicapped the ability of local politicians to easily increase spending and the European Central Bank already is employing unprecedented levels of stimulus.
  • Many countries were struggling with low growth even before the virus — Swiss Re did not include a single eurozone G7 country in its list of top 10 most resilient economies.

The big picture: A major struggle for policymakers is that much of the outbreak's economic impact is not yet measurable. That makes preparing for and assessing the potential for damage a new challenge.

  • "This is a true external shock that happens very quickly and very strongly and is totally synchronized," Holzheu says. "We know that there are impacts happening right now and we don’t necessarily see it in a lot of the metrics yet. But still we need to make assumptions about possible implications."
2. Catch up quick

The Philippines became the first country to halt stock, bond and currency trading until further notice, in response to the coronavirus pandemic. (SCMP)

U.S. markets should stay open, SEC chair Jay Clayton said in an interview, joining calls from NYSE president Stacey Cunningham and Nasdaq CEO Adena Friedman. They last closed on Oct 29-30, 2012, during Hurricane Sandy and before that on Sep 11-14, 2001, following the terrorist attacks. (Reuters)

Amazon says it plans to hire an additional 100,000 warehouse and delivery workers and increase pay by $2 an hour through April amid a surge in online orders due to the outbreak. (CNBC)

FedEx will report earnings today, providing another metric for investors to gauge the damage done by the COVID-19 outbreak, as the company is closely tied to the health of world trade. (Commercial Appeal)

The Fed offered a second $500 billion repo operation on Monday to weak demand, continuing a disconcerting theme at auctions in recent days. (WSJ)

3. Explaining Monday's 3,000-point decline

U.S. stock indexes had their worst day on Monday since 1987's Black Monday — a headline journalists had just written on Thursday, but Monday was worse. The S&P 500 and Nasdaq closed 12% lower, the worst day in the tech-heavy index's 49-year history, while the Dow fell by almost 3,000 points.

Driving the news: The selloff accelerated during President Trump's afternoon press conference during which he outlined new recommendations for Americans that included avoiding any gatherings of 10 or more people.

  • Trump noted that the U.S. "may be" heading into recession and suggested the outbreak could continue until July or August.
  • The president's comments followed an earlier announcement that New York, New Jersey and Connecticut would ban gatherings of more than 50 people and close gyms, bars, theaters and casinos and limit restaurants to take-out orders only, citing an absence of federal action.

What they're saying: “The market didn’t hear what it wanted to hear. I don’t think that it wanted to hear that this was going to last until July and August, and now the market does the math," BNY Mellon strategist Liz Young said in an interview with CNBC.

  • "If it lasts until July and August, that means we maybe have a contraction in the second quarter and the third quarter, and that means recession.”

What they're not saying: Treasury Secretary Steven Mnuchin said the White House was meeting with Senate Republicans but did not announce an imminent U.S. stimulus bill or any coordinated global action to combat the economic toll of the outbreak.

Watch this space: Trump suggested the government could provide bailouts for airlines, which are in dire need of cash. However, a recent Bloomberg analysis found that the largest U.S. airlines have spent 96% of their free cash flow on stock buybacks.

4. Coronavirus forces record low business conditions
Data: New York Federal Reserve; Chart: Axios Visuals

The first piece of concrete data on the U.S. economy since the COVID-19 outbreak started to significantly impact U.S. firms was released Monday and the results were not good.

Driving the news: The New York Fed's Empire State business conditions index fell by a record 34.4 points this month to its lowest level since the financial crisis in 2009, based on surveys conducted March 2–10. Economists had expected a reading in the single digits.

  • “The impact of the coronavirus was still in its early stages at the time of this survey. Nonetheless, the early indications suggest that the impact was substantial,” said T.J. Connelly, head of research at Contingent Macro Advisors.

Details: The new orders index fell 31.4 points to -9.3 in March. Shipments fell 20.6 points to -1.7. Labor market indicators weakened. Optimism about the six-month outlook dropped to 1.2 from 22.9.

  • Perhaps most importantly, the New York Fed's survey revealed that the number of employees fell to -1.5 from 6.6, and the average workweek fell to -10.6.
Dion Rabouin

Quote: "No problem can be solved from the same level of consciousness that created it."

Why it matters: On March 17, 1905, Albert Einstein finished his scientific paper detailing his quantum theory of light, one of the foundations of modern physics.