TOPIC: Small Business Services

Barclays' Outlook on Coronavirus Impact - Trade, Economy, Banking System Resilience, etc.

Hi CBANC community! I wanted to share some market insight we received from our banking partner, Barclays. Just one opinion and obviously there's still a lot left to unfold but figured I'd share! Doc attached for download as well. 

Brief summary of the Barclays coronavirus client call on Friday:

Macroeconomic
  • Significant reduction in global growth prospects for H1 expected, with impact greatest in particularly vulnerable regions (China, Japan, South Korea, Europe)
  • Most impacted parts of the economy include the travel sector, commodities (particularly oil) and SMEs
  • Ongoing uncertainty about outlook beyond H1, driven largely by uncertain public health forecast and effectiveness of virus containment and economic measures
  • Coordination of monetary and fiscal policy to respond to the crisis is not only encouraged, but also expected (i.e. “baked into” market expectations) – as a result, expect little impact when it does occur but significant adverse impact when it doesn’t (see market response to ECB not reducing rates last week)
Banking system resilience
  • Banking system is more resilient to respond to a credit crunch due to reforms on bank capital and liquidity requirements put in place in response to the Global Financial Crisis
  • As a result, risk of systemic failure emanating from the financial system have reduced (but not disappeared)
  • Trading floors globally have not been stress tested to a scenario where everyone has to work from home to date; however, in Asia there have been contingency measures in place for the past 4-6 weeks requiring staff to work from multiple locations, with little to no impact on functioning of global capital markets 
Capital markets
  • Turbulent forecast even prior to coronavirus, due to unstable US/China trade outlook and Brexit
  • In moments of market uncertainty, there is typically a shift towards “save haven” assets (e.g. USD, JPY, gold). However, what we have seen over the past 1-2 weeks is a flight to liquidity (even gold price declined) as institutional investors engage in broad liquidation of their positions in an attempt to manage risk
  • In FX markets:
    • Volatility is back both among G10 and especially emerging markets currencies
    • Emerging markets liquidity has deteriorated over the past 1-2 weeks, trades executed at wider spreads
    • G10 liquidity has been more stable with lower impact on spreads (impact particularly felt on forwards)
  • Last week capped the most turbulent stretch since 2008

Trade
  • Barclays do not currently see any extraordinary requests about additional working capital – utilisation levels in line with expectations
  • Feedback from corporate clients as follows: (i) lower stock and inventory levels, (ii) lower orders and production levels, (iii) cutbacks in production days, (iv) difficulty in finding additional suppliers to reduce their concentration risk
  • Sporadic but patchy reports that Chinese production is starting to come back to normal; however, these improvements likely to be offset by disturbances to both demand and supply in Western economies that are undergoing lockdowns
  • As this becomes a demand problem, quality of debtors becomes important – likely to result in working capital issues

    Earnings Credit/ECR

    SVP at a bank ($96.1BUSA)
    Reaching out for guidance on using Earnings Credit (ECR) for covering third-party vendor services - do people use bulk contracting and invoice the underlying clients or simply rebate/refund a client's bill on agreed services.   Examples being accounting software, CPA prep, or payroll...     Also on payroll, anyone had success including the HR benefits add-ons for ECR (as all the payroll companies now sell HR services too).   Thanks !