Positivenews,FedPutandWHO

Yesterday we had written about the Fed Chief Jerome Powell’s interview on Sunday. He had assured all that there is enough ammunition up the Fed’s sleeves, and that the world and markets now need to wait for a vaccine. So when the news hit the wires yesterday that a pharma company has reported positive results in pre-clinical trials, Mr Market’s optimism knew no bounds. The Dow Jones was up by close to 900 points, ramping a 3.85% gain.

Now the Fed’s position of telling markets in advance that they can be assured of its ammunition capabilities can be seen as providing a put option to the market participants. Readers would remember that a similar belief was prevalent in the 1990’s and early 2000’s by the name Greenspan Put. The idea had its origin in the belief that the Fed, under Mr Greenspan, would bail out the markets through some monetary policy action in times of a crisis. The problem with such a belief is that it promotes a variant of moral hazard in the market by supporting risky behaviour.

On the vaccine front, a vaccine journey from inception to deployment is an arduous one. It has to go through various stages, some of which can be quickened through more resources but some cannot. We know that any vaccine would eventually be injected into a healthy body with the purpose of generating a defence against a particular disease. The trick is that the vaccine essentially is a concoction carrying the strains of the same disease which it is trying to defend against. Hence any new vaccine is tested extensively to see how it impacts people with different immunity profiles over a period of time. This stage unfortunately can’t be quickened. Hence we will borrow another phrase from Mr Greenspan’s lexicon that sometimes markets can be “irrationally exuberant”.

In other news, the World Health Assembly, an annual oversight convention of the WHO, is currently in progress. The convention has suddenly become the centre of attention with a virtual showdown between the US and China. Chinese President Xi in his address to the conference yesterday praised the role of the WHO for its part in curbing the spread of the Covid-19 virus. In contrast, US President Trump posted a letter on his Twitter profile where he castigated the WHO for its role in the spread of the virus. In the four page letter he has used the name China at least 34 times to make his point about the virus’s origin. Although last year is a distant memory now, we remember how markets used to gyrate on every detail regarding the Sino US trade deal.

Domestically, the Indian rupee has opened slightly positive. It had suffered a close to 0.5% fall in trading yesterday. Stock markets, after suffering bruises yesterday, are also trading in the green. Bonds are steady. FPI flows have been net negative for the month of May with the number around negative 6000 INR. Equities have seen positive flows. Oil prices and US yields both moved up in yesterday’s trade as hope and optimism around a vaccine and the easing of lockdown increased trade. The only thing to watch out for is that the optimism should not lead to “exuberance of the irrational variety”.