[Good Morning Stock Market] $2 Trillion Stimulus Package Needs COVID-19 Prevention and China's Recovery to Be Effective

US Congress Passes $2 Trillion Stimulus Package... Largest Ever
Dow Jones Closes Higher for Second Consecutive Day... First Since February
Economic Recovery Uncertain... New York Must Secure Quarantine + China's Economic Revival Needed First

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Following the U.S. Congress passing a historic $2 trillion (approximately 2,500 trillion KRW) economic stimulus package, the U.S. stock market closed higher for two consecutive days for the first time since last month. This reflects expectations that the liquidity issues faced by companies can be resolved. However, given the strict movement restrictions due to the novel coronavirus disease (COVID-19), it remains uncertain whether economic stimulus through normalization of economic activities is feasible. Experts suggest that attention should be paid to the prerequisites such as COVID-19 containment and expansion of China’s domestic demand indicators.

◆ Heechan Park, Researcher at Mirae Asset Daewoo = The $2 trillion fiscal policy package in the U.S. corresponds to about 10% of the U.S. Gross Domestic Product (GDP). It will greatly help resolve cash liquidity problems faced by many households and companies. Former U.S. Federal Reserve (Fed) Chairman Ben Bernanke expressed a somewhat optimistic view. Although the shock from this crisis is very large, he believes it should be regarded as a natural disaster rather than an internal structural Great Depression. Therefore, assuming early mitigation of the external shock, a 'V-shaped recovery' scenario could be considered likely.

However, unlike natural disasters where recovery activities and economic normalization can begin immediately after the event, the pandemic trauma caused by COVID-19 may continue to hinder economic normalization even after the situation eases. Therefore, before investing in stocks, it is necessary to confirm whether several conditions that reduce economic uncertainty are met.

First is the reversal of liquidity crunch indicators. Despite the Fed’s strong liquidity measures, indicators such as the 'LIBOR-OIS spread,' which shows the difference between credit loans and collateral loans in the U.S. interbank funding market, and the 'TED spread,' which represents the difference between the 3-month U.S. Treasury yield and LIBOR, have not turned downward. During the 2008 financial crisis, easing of liquidity crunch was the first step leading to financial market stabilization and stock price rebound. Therefore, as long as these liquidity crunch indicators do not decline, caution should be maintained.

The success of U.S. containment efforts, especially improvements in New York State, is crucial. If containment results appear, movement restrictions will be eased with some time lag, allowing economic activities to normalize. At this time, the stimulus effects will also accelerate, speeding up economic recovery. Since China and South Korea achieved peak new confirmed cases within four weeks after their full responses, changes in the U.S. can be expected by mid-next month.

Rapid recovery of China’s domestic demand indicators is also an important factor. Since China was the first to confirm containment success, it is important to gauge the speed of economic normalization. Economic activities have resumed this month, so China’s domestic demand indicators are expected to show recovery compared to January and February. If they quickly return to the previous year’s level, i.e., 0% year-on-year growth, a V-shaped recovery scenario for the U.S. in the second half of the year can be envisioned after confirming containment success. This scenario would also reduce economic uncertainty in the U.S. after containment success.

◆ Hungil Kim, Researcher at Hana Financial Investment = Although the $2 trillion stimulus package was smoothly agreed upon in Congress, the New York stock market closed mixed due to Senator Bernie Sanders’ statement to delay the stimulus bill. Senator Sanders tweeted that if some Republican senators do not withdraw their opposition to strengthening unemployment insurance, he will hold the bill until stronger conditions are imposed on corporate welfare funds. This caused the Dow Jones Industrial Average’s gains to narrow from a peak of over 6% to around 2%.

However, asset inflows resumed in the Exchange-Traded Fund (ETF) market. It is significant that asset inflows occurred into corporate bond ETFs for the first time in 13 trading days. Recently, due to the COVID-19 crisis, corporate bond ETF prices plunged, greatly widening the spread with net asset value (NAV). Since ETF prices will converge to NAV in a short period, this presents a good buying opportunity. Additionally, attention should be paid to the China consumer goods ETF CHIQ, as consumption recovery is expected in the Chinese consumer market where the COVID-19 spread is calming down.