FXTM: 'scariest scenario is that it turns into a credit crisis'
Economic forecasts are becoming gloomier as a result of the COVID-19 outbreak, and there is the potential for a credit crisis as well due to high debt levels, said Hussein Sayed, chief market strategist at FXTM. The strategist said the outbreak in many countries may be about to reach a stage where “things get out of control, as we’ve seen in Italy.” This is likewise a challenging time for investors, since they don’t know whether the economy is headed for a mild recession or maybe even a depression, Sayed said. “So far, it’s almost impossible to know where we are heading towards,” Sayed continued. “Everything depends on when the coronavirus infections peak and begin to slow down.” The strategist pointed out that U.S. economic-growth estimates from big investment banks are becoming “increasingly dire.” He noted that JP Morgan expects gross domestic product to shrink 14% in the second quarter, while Goldman Sachs sees a 24% fall and Morgan Stanley now anticipates a 30% drop. “The scariest scenario is that it turns into a credit crisis, which will break the financial system,” Sayed said. “Leverage has skyrocketed over the past several years with inflows into U.S. corporate and emerging-market debt at very high levels. With most investors trying to withdraw their money from these asset classes, it could soon turn into a very deep financial crisis.” Sayed later added: “While it is tempting to buy stocks at their current cheap valuations, investors need to keep in mind that we still don’t have a clear picture on how the situation will evolve from here.”