The World Wants Cash Amid Coronavirus Pandemic
The coronavirus pandemic is shocking markets. The United States is now grappling with the disease. Volatility in major indexes have business on edge.
Investors are running to cash, bonds, currency and loans have seen volatility not seen since 2008.
Liquidity is king. Everyone wants cash and other easily traded financial instruments. Investors have had issues buying and selling U.S. Treasuries, generally considered a safe and liquid asset.
U.S. Dollar funding is becoming harder to obtain outside of the United States and the cost of loans are increasing for weaker-rated firms in the United States. Premiums on junk bonds is increasing.
Banks have begun charging each other more on overnight loans, and companies are drawing down their lines of credit.
Bankers, regulators, investors, and others warn of a troubling future for markets and the global economy. With consumers panicking, banks and companies feeling pressure, a funding crunch could lead us into a recession.
Francesco Papadia oversaw the European Central Bank’s market operations during the region’s debt crisis a decade ago. He fears the “illiquidity of markets, generated by extreme uncertainty and panic reaction” which could “lead to markets freezing, which is an economic life-threatening event.”
He added: “It does not seem to me we are there already, but we could get there quickly.”
Twitter is amok with coronavirus discussion and the hashtag ‘#GFC2’ – shorthand for ‘Global Financial Crisis 2’ – is trending.
“The warning signals so far are nowhere near as loud as they were in the 2008-2009 financial crisis, or the 2011-2012 euro zone debt crisis, to be sure,” writes Tommy Wilkes for Reuters. “And policymakers are acutely aware of the weaknesses in the financial-market plumbing. In recent days, they have ramped up their response.”
Central banks have cut interest rates, while devoting trillions of dollars of liquidity into the banking system. The New York Federal Reserve reserved $1.5 trillion in short-term loans and would start purchasing a broader range of U.S. Treasury securities, citing “highly unusual disruptions in the market for Treasury securities associated with the coronavirus outbreak.”
Ajay Rajadhyaksha, head of macro research at Barclays Plc and member of a committee that advises the U.S. Treasury on debt management and the economy, said central banks are working to prevent a funding crisis.
Reuters reports banks are in better shape today than 2008. Banks back then had less capital and less liquidity, according to Rodgin Cohen, senior chairman of Wall Street law firm Sullivan & Cromwell LLP and a top advisor to major U.S. financial firms.
The risk, instead, is for shops on Main Street, travel bans, and sections of the labor force sick and quarantined. The freeze would be a severe blow for corporate revenues and earnings and overall economic growth.
Countrywide quarantines to suppress the virus, as happened in Italy, suggests “businesses are going to be hit really hard when it comes to receipts, to revenue,” said Stuart Oakley, head of forex trading for clients at Nomura Holdings Inc. “However, liabilities are still the same: If you own a restaurant and you borrow money for the rent, you’ve still got to make that monthly payment.”
JPMorgan Chase & Co sees first-half contractions in growth across the globe. Investors and regulators have been frightened by liquidity pro less in the $17 trillion U.S. Treasuries Investors and regulators have been alarmed.
Interest rates or yields on Treasuries and other bonds are experiencing volatile swings in yields are making it hard for investors to execute orders.
“The tremors in the Treasury market are the most ominous sign,” said Papadia, the ex-ECB official.