The month of March was very challenging on many fronts as the risk of COVID-19 has led to many precautionary measures and a nearly complete slowdown of economic activity
From a market perspective, there was a sell-everything mentality that took grip over the financial system. Additionally, the tremendous amount of uncertainty and extreme volatility caused pockets of illiquidity to surface in many corners of the market. For instance, the commercial paper market, where high-quality companies go to borrow short-term cash, effectively came to a halt as there was virtually no demand for the paper. U.S. Treasury bills, one of the most liquid assets in the world, were in such high demand that yields became negative for maturities all the way out to September. Credit spreads widened significantly as it became apparent how difficult it was to price risk in an environment where the world economy was closing down. At the end of the day, markets were effectively broken.
The Fed responded to the market crisis quickly and effectively to facilitate liquidity and keep markets functioning
Fortunately, the Fed was able to recognize the problem quickly and responded in a very productive manner. This time around they threw in everything, including the kitchen sink, to facilitate liquidity and keep markets functioning. First, they removed the limits on their quantitative easing purchases and can now effectively buy unlimited amounts of Treasuries and agency mortgage-backed securities. They also added the ability to purchase commercial mortgage-backed securities and created two new programs to facilitate the purchases of corporate bonds.
The U.S. government also recognized the threat to the economy from COVID-19, and it too stepped up to help mitigate the crisis by means of a $2 trillion stimulus package
With Wall Street taken care of, the government then turned its attention to Main Street as Congress worked on passing a massive fiscal stimulus package to help the many Americans who will be impacted by COVID-19. The fiscal stimulus package came in three waves with the first being the $8.3bn emergency spending package passed on March 6. Wave two expanded on the spending package by adding additional sick leave, unemployment benefits, and other healthcare and preparedness measures. However, the third wave, and the largest from a fiscal spending standpoint, aims to help support the economy throughout the social distancing process. The size of the stimulus exceeded $2 trillion, nearly 10% of GDP, and will come in the form of tax credits, small business loans, and direct payments to individuals. Overall, the government recognized the threat to the economy from COVID-19 and has stepped up in a major way to help mitigate the crisis.
The oil price war between Saudi Arabia and Russia added further fuel to the already burning fire in the markets by pushing WTI crude oil prices below $20 per barrel
Oil was in a state of free fall throughout March after Saudi Arabia and Russia could not come to an agreement on production policy. As a result, both countries pushed out oil at rapid speeds. The influx of supply weighed heavily on oil prices, and WTI crude oil fell to under $20 per barrel in March. In total, we expect the price compression on oil to continue until Saudi Arabia and Russia can come to some sort of agreement and eventually reduce their levels of oil production.
Get the full April 2020 Market Update here
The views expressed above reflect the views of Allianz Investment Management LLC, as of 04/2020. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America.