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Support balances increasing strains – for how long?

The consolidation in stock markets continues. After a brief sell-off at the beginning of last week, capital markets staged a recovery to leave things almost unchanged from a week ago. All in all, markets are now just slightly above where they were after the significant recovery rally throughout April and May.

That is, in large part, down to the immense support provided by governments and central banks all over the world. This reliance on policy leaves markets particularly sensitive to the political or virus-related news flow. Recent weeks have seen markets rally on the back of better-than-expected recovery news and then sell-off on new COVID flare-ups or political tensions. Last week we saw all of the above, so the market gyrations are unsurprising. Importantly however, neither direction gained the upper hand – hence the consolidation or sideward movement.

 

Fiscal cliff-edge fears

For many businesses and individuals, emergency government support measures have been the only thing keeping them from financial ruin over the last few months. That is not just true here, where the government’s furlough and emergency business loan schemes have provided a necessary crutch. In the US, as well as the furlough scheme, citizens were given direct cash transfers. And all across Europe, wage-paying schemes have helped firms survive the COVID hiatus. We still do not know what the economic fallout from this forced shutdown will be. But it is fair to say that, without the extreme fiscal support governments have provided, we would be facing widespread bankruptcies and unemployment.

 

Wirecard turns wirefraud

It just wouldn’t be a crisis without a proper corporate scandal. German payments firm Wirecard filed for bankruptcy last week. Initially, the story was that it had “misplaced” €1.9 billion in cash (a bit like losing some coins down the back of the sofa). Now it seems the lost amount was somewhere around €3.5 billion, and the entire sofa has been spirited away.

Last weekend, the firm’s chief executive Markus Braun quit over the fraud allegations, while the chief operating officer Jan Marsalek was, apparently, not at home. Meanwhile, the hunt for the missing billions came to a dead end in the Philippines, and management was forced to admit the money may not ever have existed. Last week, Wirecard’s shares and bonds all plummeted and Braun was arrested, while Marsalek issued a statement from somewhere that he would give himself up. The end came on Thursday morning when the company filed for insolvency, which was a surprise to creditors, who thought they were still in talks about further possible support. Scandals of this size usually generate as much fear as they do publicity. Wirecard is the only firm in the history of the German Dax Index to have gone bust.

 

Read the full commentary here

 

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