With Covid-19 concerns rippling through markets, Cognito’s media snapshot intends to provide the latest insights across the many capital markets and financial services industries we support.
View from the top
All eyes are on Washington as Congress may pass the most expansive lending package since World War II. The New York Times has a rather novel idea for fixing the economy – turning it off and back on again. The Wall Street Journal found global investors and banks predicting the worst is yet to come with the global selloff.
This morning, the Federal Reserve announced it will buy unlimited amounts of corporate and municipal debt, including “securities backed by credit-card loans and other consumer debt.”
No financial services sector will remain unscathed, but each has its own unique set of challenges and approach to this unprecedented situation:
Global banks are facing a very different set of challenges compared with the last Global Recession, where they bore the brunt of blame for starting the crisis. Now they are being called to keep the economy afloat by continuing lending activity. The Financial Times argued for governmental loan guarantees to keep the money flowing. People are curious how JP Morgan may react differently with its longtime CEO Jamie Dimon still recuperating from heart surgery.
For corporates, the costs of borrowing “are rising dramatically despite central bank interest rate cuts,” writes The Financial Times over the weekend. For homeowners seeking to take advantage of lowered interest rates through mortgage refinancings, this presents entirely different issues for lenders, as employees and the underwriters and notaries they rely upon to process applications are forced to adapt to working at home.
For an industry that supposedly thrives on disruption, fintechs have had a surprising mixed response to the changes of the last week. There’s a global scrambling to secure or lock down cash for business operations. “Finding the next round of capital, in particular, has become problematic,” wrote Indian business paper Mint, citing advice from venture capital firm Sequoia. Iowca CEO Chrstoph Reich in the Times fretted that the British government’s first plan to help small businesses wasn’t enough. “Hundreds of thousands of businesses need cash, and delivering that is not a trivial exercise,” he said. With retail branches closing down, more and more banking is heading online – in some places by default rather than choice.
Money-market funds, vital for maintaining short-term liquidity, suffered sharp outflows last week as investors fled. This prompted Moody’s Investors Service to downgrade its outlook on global money markets to negative on Wednesday, while The Federal Reserve took measures to backstop the sector.
Two large banks - BNY Mellon and Goldman Sachs - also took measures to protect their prime money-market funds, injecting billions into key portfolios. While most believe outflows will not accelerate to levels seen during the 2008 financial crisis, it's a sector that will be monitored closely in the weeks to come.
Alternatives: Hedge funds & private equity
Emerging news coverage of these groups is split into two camps: the fallout of their investment strategies and actions prior to the Covid-19 outbreak, and the actions they are taking now to either stem the bleeding or find new investment opportunities.
The backlash against hedge funds was in full-effect last week, with the target squarely on the backs of both highly-leveraged funds, as well as those that deploy ‘risk parity’ strategies - arguing that both have exacerbated sell-offs.
For private equity firms, the question is if and when the other shoe will drop as bad investments and over-leveraged deals will come to the surface faster than usual. Bill Ackman is not optimistic.
Through everything, however, many of the world’s richest investors continue to buy, seeing “bargains of a lifetime.”
The press spent most of the week speculating about how much the industry would have to pay out in response to the crisis. The answer appears to be not much. Congressional pressure in America is building for companies to go beyond requirements, to little success. “Most business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19,” Insurance Journal reported, also noting many insurers thinking creating these policies would be next to impossible to model. The New York Times lays out the faults of a pandemic bond scheme launched by rich countries to help poorer ones – which has mostly benefited investors.
Probably the biggest symbolic change this week is that one of the world’s most watched and respected markets – the New York Stock Exchange – will have no traders on the floor for the first time in more than 200 years. Actual market activity, however, will continue much as usual. We may see more circuit breakers hit – and more debate about whether these actually help calm markets.
This is to say nothing of the emerging conversation around temporarily shutting down markets, which many fear “would wreak havoc on the U.S. and European economies.”