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V or W shaped Recovery?

By Marius-Cristian Frunza
Weekly Briefs

Reducing the spread of the pandemic in the US is the main factor that will trigger the exit from the current crisis. A “V-shaped” recovery encompassing a gradual return to the previous state of the economy is the main scenario priced by the financial markets. But, a global recovery cannot come without a steady recovery of the US economy.  The faster the US economy will recover, the higher are the chances for the other economies to move towards normality.

The US seems to be hit harder by the pandemic than expected. The likelihood of an exit from the lockdown in the foreseeable future is low. Moreover, the number of casualties is increasing rapidly, and the pandemic severely tests the US health system. Thus, the impact of the pandemic on the US economy may be more damaging than expected.

Assuming that the US economy starts a recovery by May, the aftermath may be heavier than believed.  Only when the pandemic starts to retreat, the real impact of the crisis and the actual losses inflected to the real economy could be estimated. At that time, the market will price the situation based on more comprehensive data, and a new dip could occur. Thus,  a "W-shaped" recovery is the most probable optimistic scenario.

Market overview

After two tormented weeks, the stock markets seem to navigate in more calm waters. The VIX index,  a popular measure of the stock market's expectation of volatility based on S&P 500 index options, dropped continuously from the peak reached on the 20th of March. The market is confined in an expectative state, waiting for new information to reprice the current level. In this state, the fundamental value is not deterministic, and the only drivers are the news that could impact the future evolution of the market. Currently, the market prices an exit from the crisis towards the end of April. Nevertheless, if the lockdown extends in May, a new market correction should arrive in the next week.

Commodities market:

Oil prices found a new direction

Oil prices found last week a new direction and the Brent gained territory and reached 34 USD. This move occurred amid planned negotiations between Russian and representatives of the Organization of the Petroleum Exporting Countries. Nevertheless, the rally could be short-lived as the meeting planned for next Monday between OPEC, Russia and other oil producers has been put off. The new deal aimed to end the torment in oil markets may not come as soon as planned and a new dip of the Brent is expected.

Sector focus:

Who will bailout the airliner manufacturer?

Airbus and Boeing lost more than 62% of their market capitalizations since the beginning of the pandemic, while Bombardier dipped by over 80%. The significant losses triggered some of the debt covenants of these companies and threatened their survival seriously.   Most airlines are in a similar situation, and the global air transportation market will observe a substantial consolidation. Under the various scenarios, the industry may recover more difficultly than the other sectors. Therefore, a large number of bankruptcies could occur in the air transportation sector in the next quarter. The US and the EU have no other option but to bailout at least the two leading manufacturers and the connected industries.

Market outlook

The timing and the size of the recovery depends on the spread of the crisis in the US. With the acceleration of the contamination in the US, the perspective of a recovery in April have a low probability. All markets are expected to move into negative territory except gold, which could find a positive momentum, as a safe- harbour investment.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial in- strument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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