Global markets are on the way to crisis.
At present, as the global epidemic further spreads and tightens, the market is in panic. On the evening of the 12th, Beijing time, US stocks triggered a second blowout this week. As of 21:35, the Dow fell 1696 points, or 7.2%, the Nasdaq and S & P 500 fell 7%, and all three major stock indexes have entered a bear market. The turns of US debt and US stocks have explained the high degree of uncertainty in the global market in recent days.
Global markets are on the way to crisis. A foreign trader told CBN that "the US dollar ’s liquidity in the financial system has begun to tighten, the US dollar ’s function as a global financing currency has once again manifested, and credit spreads have begun to expand, which is a precursor to the crisis.”
The European Central Bank announced on the evening of the same day that it would expand the QE scale and provide more favorable interest rate conditions for related corporate loans. All circles are expected that the Fed will also cut interest rates by 50 ~ 75 basis points (bp) next week. The Bank of England has cut interest rates by 50bp on the 11th, the same day the British government announced a 30 billion pound fiscal stimulus package.
Earlier, the MSCI All World Index peaked on February 12, and from the early hours of February 12 to March 12, Beijing time, the European Stoxx 600 Index fell 22.73%, the S & P 500 fell 18.88%, and 12 The day-to-day US stock market index shows that the decline is still expanding, and the European and American stock markets have really entered a bear market.
"After the market crash, the current level of each market may already reflect an average probability of two-thirds of a recession. Therefore, if there is no recession, or if the recession is shallower than usual, or has a shorter duration, This indicates that the stock market has good investment value. "Wang Xinjie, director of investment strategy at Standard Chartered (China) Wealth Management Department, told First Financial. However, he also believes that although the technical pattern shows that the stock market is already oversold and approaching strong support levels, the market may continue to fluctuate sharply until there are clear signs that the epidemic prevention operations have achieved significant results.
In the early morning of the 12th Beijing time, the World Health Organization (WTO) officially labeled the pandemic virus outbreak as a "pandemic". Currently, there are more than 126,000 cases worldwide. The rate of new cases of new pneumonia infections in the United States and Europe is still accelerating. The United States and Europe have upgraded their epidemic prevention measures. US President Trump announced on the evening of the 11th local time that all citizens of European countries except the UK will be suspended from the 13th. For 30 days. This has weakened investor expectations for economic growth, and the market is full of panic about the recession, and even if Trump said in the previous speech that it would provide $ 200 billion in liquidity, it could not stimulate the market.
Even if the global economy has not entered a recession and liquidity is particularly accommodative, the stock market may not be able to stabilize effectively until the inflection point of the epidemic appears. Zhong Nanshan, an academician of the Chinese Academy of Engineering, said on the 12th that if countries can respond to WHO's appeal and take national-level intervention, countries can mobilize, and the new crown pneumonia epidemic is expected to end in June. However, he emphasized that this was an assessment based on active measures taken by countries.
European and American stock markets enter a "bear market"
In the past two weeks, the number of new cases of new coronary pneumonia diagnosed outside China has increased by 13 times, and the number of infected countries has tripled. As of 19:00 on the 12th, according to the real-time monitoring data of Johns Hopkins University, there were more than 126,000 cases in 116 countries, and 4,641 people lost their lives. Italy, with 12,462 confirmed cases, has become the country with the worst epidemic outside China. Iran and South Korea have confirmed 9,000 and 7,869 cases, respectively. France, Spain, and Germany have over 2,000 cases. The United States has reported 1,312 cases.
WHO Director-General Tan Desai said that in the next few days or weeks, WHO believes that the number of confirmed cases of new coronary pneumonia, the number of deaths and the number of affected countries will continue to rise. "This is not just a public health crisis, This crisis will affect all walks of life, so every industry and everyone must participate in this battle. "
Mark Hadley, a professor of network systems at the University College London, sorted out the development curve of the epidemic in various countries and found that the current curves of the United Kingdom, the United States and the major EU countries coincided with Italy's early stage, which means that it is likely to follow in the footsteps of Italy.
On the evening of the 12th, Beijing time, US stocks melted in the opening 5 minutes, the second time this week. At the close of the previous day, the three major US stock markets fell another 5%, and the European stock market fell into a bear market for five consecutive losses.
The market is pricing in a possible global recession. UBS expects the global growth rate to drop to 2.3% (previously 2.9%) in 2020, and eight countries will fall into recession. However, the agency also considered two escalation scenarios: a medium scenario where the number of infections increased by a factor of 1,000, and a new crown pneumonia developing into a truly global pandemic. In the former scenario, the global year-on-year growth rate dropped to 1.6% (16 of the 28 countries fell into recession), and in the global pandemic scenario, the global year-on-year growth rate dropped to 0.8% (18 of 28 countries fell into recession) ).
According to its estimates, the global growth rate currently reflected by the market is only 2%, while the long-term average is 3.5%, 4% before the new crown outbreak, and 2.8% before the OPEC + conference talks. This "double blow" means growth expectations hit the worst eight-week drop since the global financial crisis. "Even so, as long as the number of confirmed cases continues to increase, several types of risk assets have not bottomed out. The market does not reflect our two upgrade scenarios." UBS said.
For the global weathervane of US stocks, the current unfavorable factor is that during the SARS and H1N1 outbreaks, US stocks were at a low level. Before the outbreak, the US stocks showed signs of foaming. "US stocks are already at the end of the cycle, and there is also a need for correction itself. In addition, passive investment such as ETFs have continued to expand in the past few years. In 2004, the size of ETFs was about 33.8 billion U.S. dollars, and it expanded 16 times in 2018." (Persistent Asset Management) Chief Investment Officer Huang Xin told First Financial reporter. There are also opinions that passive ETFs do not do price discovery, and there is a role of assisting the market when the market crashes.
This time, the decline in US stocks has been so rapid and sustained for so long because of the domino effect caused by different investment forces.
Huang Xin believes that the first wave of sell-offs is likely to be those speculators; as the decline expands, the selling power is shifted to CTA (Trendy Commodity Trading Advisor Strategy), risk parity, and these programmatic sell-offs. The valve was triggered successively; subsequently, passive investments such as ETFs will also be redeemed and intensified sell-offs; finally, some medium and long-term investors (such as pensions, endowment funds, social security funds, etc.) will also begin to adjust their investment portfolios and adjust their positions. Due to their expectations of worsening economic outlook.
"The non-linear factors of the stock market have always existed, and such factors will be strengthened in times of crisis. While the computing power of computers is constantly rising, replacing many manual tasks, this trend is difficult to reverse and can only continue to optimize strategies and algorithms." Huang Xin said.
Four signs of panic subsidence
How deep will the global market fall this time? When will the market turn around?
The MSCI side told reporters that the current situation is reminiscent of the market situation after the 911 incident of 2001 and the global financial crisis in 2008. Global stock markets continued to fall in the 6-12 months after the first two extreme events, with a total decline of more than 50%. In both events in 2001 and 2008, market volatility continued to rise after the initial shock and peaked in the months before the market bottomed. Whether this crisis will follow a similar pattern to the past remains to be seen.
Hu Yifan, Investment Director and Chief Chinese Economist, UBS Wealth Management Asia Pacific, told First Financial News that as to when the panic subsides, the next four signals need to be closely monitored, which will affect the mood of panic and observe whether the financial market outlook An important determinant of improvement.
The first is evidence that the outbreak is under control. Except for Wuhan and Hubei and imported cases, there are few new cases in China. South Korea, which has the highest number of infections outside of China, has also begun to slow the increase in the number of newly diagnosed patients. If there is more evidence that more and more countries are slowing down new cases or successfully controlling the spread of the epidemic, it will be a clear positive signal.
The second is the impact of the epidemic on the economy. Consumers are reducing travel and leisure spending due to avoiding the epidemic, which will inevitably impact the economies of various countries in the short term. Once the worries ease, consumer behavior will begin to respond to lower oil prices (cheaper gasoline) and sharply lower mortgages (currently fixed interest rates on US 30-year loans are 3.29% and 4.41% a year ago). It is important that before facing the threat of viruses, the non-agricultural employment data for February released on Friday showed that the US economic situation is still strong. If the impact of the epidemic subsides, you can expect consumption to return to stability.
As far as policy responses are concerned, the Chinese mainland and Hong Kong have announced some fiscal stimulus measures, and the Italian Prime Minister has also indicated that a large-scale "shock therapy" will be adopted. Countries such as Germany and Germany are also discussing fiscal measures to save the market. The current market expects that the Fed will continue to cut interest rates by 50 ~ 75bp in March. The market believes that the crisis allows some countries to justify joint monetary and fiscal action.
Finally, valuation. Valuations are rarely the trigger for ups and downs, because "cheaper can be cheaper." However, for nervous investors, this can serve as a benchmark for measuring long-term performance potential. Declining bond yields and lower stock prices mean that stocks are more attractive. The 12-month historical price-earnings ratio of the S & P 500 index is 5.4%, and the 10-year yield is 0.5%. The spread between the two has reached 4.9%, the highest since 2013. The 12-month historical price-earnings ratio in Europe is 7.1%, compared with 10 years. The gap in German government bond yields (-0.87%) was 7.9 percentage points, the highest since August last year. After the relief of the panic epidemic in this regard, the interest spread will be a new bright spot to attract investors.
Epidemic tests central bank "lower limit" and government control
All circles believe that the "lower limit" of the central bank's interest rate will be tested again, and whether governments can launch effective epidemic prevention and economic rescue measures is also key.
On March 12, the European Central Bank kept interest rates unchanged, but announced that it would expand the QE scale and temporarily buy assets worth 120 billion euros until the end of this year. At the same time, the European Central Bank also launched a TLTRO (Directed Long-term Refinancing Operation) specifically for small and medium-sized enterprises. From June 2020 to June 2021, the bank will receive an additional 25bp lower interest rate, which is intended to encourage banks to Related companies lend money. All sectors are expected that if the situation deteriorates further, the European Central Bank will not rule out a further 25bp rate cut (deepening negative interest rates) and expand corporate bond purchase plans.
The previous day, the Bank of England has also cut interest rates urgently. Paul Brain, head of Newton's investment management fixed income for New York Mellon Investment Management, told reporters that the Bank of England's emergency interest rate cut on Wednesday was one of the country's fiscal and monetary policies to cope with the economic shock of the virus. In fact, the impact of restricting tourism and travel on the British economy has not yet fully manifested, and interest rate cuts can be regarded as defensive measures. The choice to cut interest rates on the same day as the budget was announced was a sign of coherence within the British government.
"Other central banks have also begun to cut interest rates and focus on improving liquidity. However, given the partisan struggle and bureaucracy in some countries, not all economies can respond as flexibly. Reducing the cost of capital will help the economy, but the epidemic is short-term. The impact of internal cash flow on corporate cash flow is the biggest concern, and the government needs to use other methods to help companies weather the crisis. "He said.
Last week, both the United States and Canada were cut by 50bp. The market expects that the Federal Reserve will cut interest rates by another 50 ~ 75bp next week, and the European Central Bank will further deepen QE. Central banks in all developed markets may be forced to respond, otherwise market volatility will continue or intensify.
Hu Yifan told reporters that the oil shock following the collapse of the Saudi-Russian talks, at least in the short term, will collapse all inflation expectations. The long-term oil war between these two countries may keep oil prices low for a longer period of time. At the same time, oil prices also need to face the decline in demand caused by the epidemic. Central banks of various countries have to deal with multiple "black swan" incidents at the same time with limited "ammunition", which can be described as a difficult task.
Although China's epidemic situation is relatively optimistic, it was achieved under extremely strict prevention and control measures, so there is also an “economic cost”. Lu Ting, chief economist at Nomura China, told First Financial reporter that China cannot underestimate the three major follow-up issues. Risks include: the risk of importing an overseas epidemic; the potential recurrence of the epidemic caused by the intensive movement of more than 100 million people during the resumption of labor and production; the spread of the epidemic overseas may lead to lower overseas demand in the future, which will affect China's export trade. He emphasized that the suggestion of "not flooding heavily" is not the same as that China does not need countercyclical policies. Certain policy underpinnings are necessary.
At present, directional RRR cuts are also expected to heat up. On the evening of March 10, Premier Li Keqiang hosted an executive meeting of the State Council. The meeting pointed out that it is necessary to step up the introduction of targeted inflow reduction measures for inclusive finance, and increase the reduction of shareholding banks, to encourage commercial banks to increase loan support for small and micro enterprises and individual industrial and commercial households, to help resume work and production, and to reduce financing costs. .
Author: 4. Alina Cho elegant Chen Ting