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Stock market eyeing economy reopening, not virus-related data: Chris Wood

May is going to be when there will be a staggered process to start opening up the American economy, said Chris Wood
Global equity markets are eyeing reopening of major economies across the globe rather than virus-related data, said Christopher Wood, global head of equity strategy at Jefferies in his weekly note to investors, GREED & fear. As regards the United States (US), Wood expects a gradual opening up in May.

“The stock market, in GREED & fear’s view, is now more focused on news on re-opening than on the virus-related data, be it cases or deaths. May is going to be when there will be a staggered process to start opening up the American economy. Because of America’s federal constitution this is going to go state by state, a process which will be distorted by the politicisation of Covid-19,” Wood wrote.

Texas has already begun a gradual reopening this week with their Governor letting the stay-at-home order expire on Thursday as scheduled and allow businesses to begin reopening in phases from Friday. The move will see restaurants, retailers, movie theaters and malls to be operate at up to 25 per cent of capacity as long as they follow social distancing guidelines. Bars, barbershops, hair salons and gyms, however, remain closed.

“A second phase of business reopenings could come as soon as May 18 when businesses would be allowed to operate at 50 per cent capacity. In Georgia salons, barbershops, tattoo parlors, gyms and bowling alleys were given the green light to open last Friday, while restaurants resumed dine-in service and movie theaters were allowed to reopen on Monday,” Wood wrote.

Monetary easing

These developments, Wood believes, will get a thumbs-up from the markets in the days ahead. Their attention them, would turn to whether the aggressive monetary and fiscal policies announced by global central banks, especially the US Federal Reserve (US Fed), will be withdrawn. In his view, the US Fed has already played its main role in this crisis by its aggressive move on corporate bond purchases, which reversed the alarming rise in credit spreads.

“Most likely, the policies will be withdrawn much more slowly than they are introduced. That is if they are withdrawn at all. For now the central bankers are still competing to announce more 'easing' and being duly cheered on, as usual, by the financial chattering classes,” Wood wrote.

Meanwhile, back home, most analysts expect the Reserve Bank of India (RBI) to continue with its accommodative stance and lower rates in financial year 2020-21 (FY21) as well in order to support the economy. Fitch ratings expects the Indian central bank to cut key rates by 75 basis points (bps) by March 2021 as the measures undertaken till now to support the economy remain insufficient.

Given the sudden shock to the economy in the backdrop of the coronavirus pandemic, analysts at Nomura, expect the government to temporarily suspend the Fiscal Responsibility and Budget Management Act (FRBM), and will push the fiscal deficit beyond the 0.5 per cent of GDP that the current fiscal rules allow.

“Consequently, we believe the central government’s fiscal deficit will rise to around 5.1 per cent of GDP in FY21, with considerable upside risk, depending on the quantum of forthcoming fiscal support. With states’ budgets combined, the consolidated fiscal deficit will expand to around 9.5 - 10 per cent of GDP, close to record highs in the recent past. Additionally, lower nominal GDP growth, along with rising contingent liabilities (support to banking sector) are likely to materially raise the public debt-to-GDP ratio,” Nomura cautions.

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