Earlier this week the revelations of the International Consortium of Investigative Journalists and in collaboration with Buzzfeed on the content of Fin Cen files and always on the laundering of astronomical amounts for more than twenty years by the largest banks in the world gave the “charismatic shot” to stock market indices that over the last three weeks have been following a steady downward trend. The Dow Jones Industrial Average retreated more than 800 points during the session on Monday, September 21, 2020 and closed minus 500 points.
by Trust Economics-https://trusteconomics.eu
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The reasons that make investors extremely cautious and thus take short positions as to future market expectations could be summarised in:
- The limited consumer spending will be further reduced and as the WHO awaits a second and third wave of the Covid-19 pandemic worldwide and which will cause both the corresponding lockdown and further drastic reduction in global demand and consumption.
- Fin Cen Files’ revelations about suspicious trillions of dollars’ worth of transactions by major global banks.
- The fierce debate between US presidential candidates Donald Trump and Joe Biden respectively over the procedure to be followed for choosing a replacement for the recently deceased US Supreme Court Justice.
- The fierce campaign for the US Presidency, which over time and as we approach the November elections, is becoming increasingly harsh and the anguish of citizens and institutions over whether the two Presidential candidates will accept the election result or lead to a deep division in US society.
- The apparent weakness of the U.S. technology industry, which has the largest percentage in the composition of the main U.S. stock indexes, and any change in investors’ future expectations are also changing their course.
- The continuous decline in the value of the shares of both oil mining, disposal, and marketing companies as well as airlines and travel companies respectively due to the possible and upcoming new social and economic lockdowns.
- The fact that investors generally consider share prices to be high, relative to the book value of the respective companies but also to the increasing chances that the global economy will not grow based on projected expectations.
- The ever-increasing level of U.S. Government debt of the federal government. The US Congressional Office recently reported that in September public debt is expected to rise sharply to 98% of GDP in 2020, up from 79% at the end of 2019.
In addition, it is projected that in 2021 US debt will exceed 100% and 110% of GDP in 2021 and 2030, respectively. On the other hand, the IMF estimates that US government debt as a percentage of GDP will exceed 130% after the definitive end of the Covid-19 pandemic.
This makes US government bonds less attractive to investors. If there is an unclear and unrecognized election result from the two candidates for the US Presidency after the election, then political uncertainty will further increase the risk that at some point the US government will not be able to repay its debts.
As the world’s largest borrower, the US will act as a debt management model and influence how other economies manage their public debts, in terms of the amount and duration of debt they issue.
For all these reasons investors are looking for safe assets relatively risk-free.
Government bonds in the EU and the euro area assets are currently the safest investment assets an investor can look for. The fact that for the first time the EU Commission will borrow a huge amount, with the agreement of the 27 member States, to be allocated fiscally to eliminate the recession caused by the Covid-19 pandemic and also to allocate in investment-projects for the green transition of the European economy works like a magnet for investors.
Investors should try to invest in long-term European bond securities.
Governments, when experiencing a high deficit in their state budget, prefer to issue short-term bonds (T-bills) to refinance this debt in a much longer-term sense and long-term maturity bonds to lengthen the average maturation of public debt significantly so that they are not burdened by high interest rates during their term of office.
Longer-term loans are generally more expensive than borrowing again and again with short-term securities.
But short-term bonds leave a government exposed to rising inflation. In such a case, trying to replace short-term borrowing with long-term borrowing would cost too much by diverting the budget when it needs support.
