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Morning Note: Of Markets & Recession

The International Monetary Fund (IMF) just published its World Economic Outlook for 2020 and 2021. The IMF said that “the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis, slipping into a recession but bound to conditionally recover quickly.

The anticipated recoveries are somewhat reassuring news, but if the forecast is accurate, the global market would still fall short of its pre-virus trends. The organization was also very cautious in their projections, acknowledging that if the virus hangs around for longer than expected or rebounds at a later point, an even greater contraction could be expected, as well as a slower recovery. “Like in a war or a political crisis, there is continued severe uncertainty about the intensity of the duration and intensity of the shock,” said Gita Gopinath, the IMF’s chief economist.

The IMF also issued debt relief to some of the poorest countries spanning from South America, Middle East and Africa. The debt relief gives these countries an opportunity to divert these funds to the fight against COVID-19.

In Markets today, Asian share markets took a breather on Wednesday as warnings of the worst global recession since the 1930s underlined the economic damage already done even as some countries tried to re-open for business.

China moved again to cushion its economy, cutting a key medium-term interest rate to record lows and paving the way for a similar reduction in benchmark loan rates. While not unexpected, it did help MSCI’s broadest index of Asia-Pacific shares outside Japan edge up 0.3% to a fresh one-month top. Shanghai blue chips, however, eased 0.2%.

Japan’s Nikkei was still off 0.5%, though that followed a 3% jump the previous session. E-Mini futures for the S&P 500 dipped 0.5%, following a 3% rise in New York.

Oil futures rose in Asian trade but were still well lower than last week despite the weekend deal by producer nations to cut output by nearly 10 million barrels per day from May. Prices had been battered after the coronavirus outbreak sent demand off a cliff, with a Saudi-Russian price war compounding the crisis. Both major international benchmarks saw a brief rally at the start of the week but have since fallen below the prices seen before the production cut was thrashed out.

Bond markets globally continue to wage on tough times ahead, along with unlimited support from central banks and a disinflationary pulse from lower energy prices.

The NSE is likely to open the day with mixed reactions from investors as the virus numbers rise in Kenya and markets globally continue to stabilize. The volatility in markets could still be high, with the IMF report into consideration but the quantitative easing being done by governments across the world could make these markets more attractive. We believe the central bank of Kenya will take more Q.E measures but at the same time not to the extent most countries have gone to. The economy was already battered even before the virus came into play and as it stands, we believe Central Bank can only do so much.

As Co-op bank rushes to close their books today, investors are likely to race for dividends, while at the same time prepare for a price decline as books closure effect kicks in tomorrow.