What’s Happening: The Fed revealed hundreds of millions of dollars in purchases of individual corporate bonds on Sunday, while identifying nearly 800 eligible issuers whose bonds it could buy in the future.
The Federal Reserve’s action has been praised by investors for easing conditions in the credit markets after it deteriorated rapidly in March, avoiding a potentially catastrophic corporate cash crisis that could have triggered a wave of bankruptcies.
In a note to clients on Monday, Goldman Sachs said the Fed’s announcement that it would buy corporate bonds in the primary and secondary markets was enough to quickly provide relief.
“The mere presence of backstops helped restore the flow of private credit,” said chief economist Jan Hatzius.
The policy has proven to be “remarkably powerful” in combating this crisis, Goldman Sachs said. But it is unclear whether the Federal Reserve should use it as a regular tool to combat future recessions, according to the investment bank.
This crisis is expected to be severe but short, reducing the risk of propping up inefficient “zombie” firms that should fail. That may not be the case next time.
Furthermore, there is a fear that a continued commitment to buying corporate bonds could create so-called “moral hazard,” encouraging companies to borrow more from less selective lenders in the expectation that Federal Reserve intervention would limit risks.
“Cost-benefit compensation is unlikely to be as favorable in the next recession,” said Goldman Sachs.
Nor has Fed action made credit markets completely impervious to a complex and rapidly changing outlook. Should the pandemic force another wave of bruise closings that could derail the recovery, loan conditions could tighten again.
“The risks of reimposing the blockades are high, and the monetary policy stimulus that explains most of the recovery in asset prices since the March lows will be less effective in the future if it does not translate into a rebound in economic activity and better prospects for corporate earnings, “Hussein Sayed, chief market strategist at FXTM, told clients on Monday.
Facebook boycott gains strength among advertisers
The latest: Facebook shares fell more than 8% on Friday, posting its worst day since March. They are down nearly 4% in premarket trading.
The drop erased more than $ 50 billion from the company’s market value.
CEO Mark Zuckerberg announced an expanded hate speech policy on Friday, including banning ads that use scapegoats, immigrants and asylum seekers. Facebook will also apply warning labels to user posts that are newsworthy but violate the platform’s policies.
Most of it comes from small and medium-sized companies. Tens of thousands would have to act over a significant period of time to take its toll on Facebook’s results, reports my CNN Business colleague Brian Fung.
Look at this space: Twitter shares are also falling as companies pause advertising on social media. The company’s shares fell more than 7% on Friday and fell 3% in pre-market operations.
Pioneering Fracking Chesapeake Energy Goes Bankrupt
Chesapeake was once the second largest natural gas producer in the country thanks to early fracking bets. Aubrey McClendon, the late founder and CEO of Chesapeake, was considered one of the leaders of the oil shale boom that made the United States the world’s largest provider of oil and natural gas.
But bankruptcy rumors swirled as the company grappled with low energy prices and a mountain of debt.
The coronavirus crisis exacerbated those challenges. Despite a recent recovery to $ 40 a barrel, the price of oil has fallen sharply this year due to oversupply and falling demand caused by orders to stay home.
“In the current commodity price environment, Chesapeake is burning cash while production is declining, which is not sustainable,” said Spencer Cutter, credit analyst at Bloomberg Intelligence.
What it means: Demand is starting to pick up, helping crude prices rise again. But they are still too low to guard against a series of bankruptcies as producers struggle with insolvency.
Until next time
Pending US home sales for May posted at 10 am ET.
Coming Soon: Did consumer confidence in the United States continue to improve in June?
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