It is a whole new world. Things happening in financial markets are unprecedented. It is like a whole new planet being discovered. Governments all over the world are pouring money over economic problems arising out of the spread of the COVID-19 pandemic. In the event of a financial crisis, the government policy response has intensified dramatically since the great depression of 1929.
Money printed and pushed into the economies runs into trillions of dollars, no less. The United States government is leading the response and has committed significant resources to curb the economic fallout of the crisis.
In one action, the US government has already granted loans of close to $350 billion to 16 lakh small businesses. These are primarily extended to businesses borrowing smaller amounts to keep employees for at least eight weeks during the crisis.
Rich countries are able to flood financial markets with money without any fear of inflation on the ground. The US dollar and the Euro are reserve currencies. That printing of money is funded by an endless appetite of central banks around the world to hoard those currencies. These high foreign exchange reserves are then pushed into the US and other rich country treasury bonds. The response is the same as in 2008-09, but the quantum is way too high.
There is fear across financial markets on the demand side of the story. The great oil price crash is a case in point. People do not have place to store surplus oil in the short-term. Without dwelling into the complexity of the futures market, we will say that the market is actually paying to store oil. That has never happened in the history of markets. Countries like India that rely on oil imports will rue not creating strategic oil reserves. Technically, India could have stored the entire year’s supply of oil for free and got paid for it!
That tells us something about the future demand scenario. Oil is a lead indicator for the demand side of the story. If people are not picking up oil, it indicates that any recovery in the demand is way too far. Airlines have come to a standstill. Travel, tourism and business travel are unlikely to see any normal soon.If that is the case, economies in the emerging markets like India are at a risk. They neither have the fiscal power like the United States nor do have reserve currencies to print money. A lockdown that lasts longer can destroy the structure of these economies.
The Indian government has provided a regulatory relief to small businesses and individuals on filing of returns and tax payments. It has started giving cash handouts to the poor. The Reserve Bank of India has also allowed loan moratorium for three months for individuals and small businesses.
There is an underlying hope that by June 2020, the pent-up demand would be lifted after the lockdown.However, analysts are already saying that India’s response is underwhelming. It appears like that even more when you look at just one action the US took for small businesses. A meaningful government action needs to address the demand situation without causing inflation.
Meanwhile, gold prices are rising steadily. That is the first indicator of an uncertainty ahead. Fear induces gold-buying. Bond markets are another indicator where long-term bond yields are rising due to pressure on government finances with high fiscal deficit and borrowing. It shows the uncertainty emanating out of the struggle faced by the Indian government in shoring up tax revenue and managing expenditure in the ongoing crisis.
The stock market trend suggests a rally over a one-month period. But if you track changes in CY 2020 so far, only pharmaceutical and healthcare shares are in a positive territory. Every other sector shed at least 20 per cent in value.
Fitch ratings, a credit ratings firm, has projected India’s growth to be 0.8 per cent in 2020-21. The Confederation of Indian industry or CII, a large industry body, has projected one scenario where India goes into a recession and the economy shrinks. All of that has put financial markets in a tizzy.
Markets are sending a signal of confusion. That is driven by an uncertainty over the future economic growth and effectively the growth in revenue and profits. The future of your money is dependent now on the government’s policy action.
