S&P 500 and the Payroll-tax
March 12nd, 2020
The roller coaster ride in the markets will likely to continue for some time. Today, the Bank of England announced a 50 basis point interest rate cut. President Donald Trump’s stimulus package, which includes a permanent payroll tax cut, attempts to mitigate the effects of the pandemic and the worst oil price rout in three decades. If the oil price does not recover, nearly 50% of the US shale industry might face bankruptcy.
We believe neither the rate cuts nor the pay-roll tax measures will be effective in dealing with the current crisis. If unemployment increases drastically because of the epidemic, the payroll-tax relief will become rather irrelevant. One has to have be employed for its relevance. Even if the US interest rates become negative, it is unlikely that the US consumers’ confidence will be restored till the pandemic shows clear signs of ebbing.
We think cutting the income tax rate for the lower income bracket may be more effective. Cutting taxes increases the budget deficit at least in the short term. Nevertheless, this may be a price worth paying given the enormity of the problem in hand.
The escalation of the crisis is so severe now, a short-selling ban on stocks may be necessary. The U.S. SEC Rule 201 restricts short selling for stocks that decline 10 percent from the previous day’s closing price. Given that we are going through extraordinary times where everything is put on hold, a short-selling ban might mitigate some of the value distraction in financial markets.
USD/TRY, the good, the bad and the (potential) ugly
Six days ago, Russia and Turkey agreed to a ceasefire in Syria’s Idlib province after the escalation of violence, which left many Turkish and Syrian soldiers dead after the clashes. The volatility in the USD to Turkish Lira has relatively calmed down since then.
The emergency interest rate cuts by the Fed has helped the weak Turkish Lira somewhat. Another silver lining was the oil price crash from last Monday. Turkey is a net importer of oil. We believe that the efforts to control Turkish inflation will benefit from the recent reductions in the cost of fuel.
Another positive development was the fact that Turkey had escaped the global pandemic unscathed up to now. Now the bad news: today, it was announced that this is no longer the case. We believe that Turkey has had longer time to prepare for the coronavirus crisis . However, the tourism sector makes a big contribution to the Turkish economic growth. If the crisis escalates, it has the potential of turning ugly, pushing the Turkish economy into the doldrums.