Bassanese Bites: Fed faith – April 20 2020

Global Markets

Despite continued shocking US economic data and corporate earnings results, hopes with regard to US curve flattening and potential re-opening of the US economy continued to drive a positive view on risk markets last week. Other positives were a leaked media report suggesting Gilead’s remdesivir drug can reduce the risk of death from CV-19, as well as a lingering view view that the Fed simply won’t let Wall Street drop again in a big way – and could even buy equities if need be.

Also helping the US market in particular is the fact that the leading tech-style stocks – such as Amazon – have been least negatively effected by the shutdowns so far, and there’s now a major crowding into these perceived safer stocks taking place.

To my mind, the market’s are getting a little giddy.  Despite US President Trump’s cajoling, many State Governors remain reticent to ease social distancing restrictions quickly – especially given the lack of testing infrastructure yet to be put in place to quickly contain any further outbreak.  As regards the “wonder drug” remdesivir, moreover, some have pointed out the lack of a controlled study – as given many of the patients used in that trial had less severe symptoms, most would have been expected to recover nicely in any case!  US tech will also be negatively affected to the extent the recession drags on and both consumer spending and advertising budgets are cut.

Lastly, I’m also a little troubled by the market’s now cult-like belief in the Fed – to the extent that the Fed may buy equities to support the market should there be a renewed decline.  Even if the Fed did intervene – I still think it is a Rubicon it won’t cross – I doubt it would have much sustained effect if stocks start falling due to a renewed bout of pessimism with regard to the economy and earnings.

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