A new wave of policy stimulus is on the way. Central banks across the globe are re-opening their toolboxes with the BoJ announcing action to provide liquidity, the Fed projected to cut interest rates and most developed and emerging market monetary policymakers ready to act. Governments are also taking action with Italy announcing fiscal measures to mitigate the covid19 outbreak’s impact.
So far, it seems the reassurance of combined monetary and fiscal measures are calming the financial markets. After initially dropping in early Asia trade, most equity markets are recovering from last week’s steep sell-off. China’s Shenzhen is up more than 3% at the time of writing, Japan’s Nikkei is 1% higher, UK’s FTSE 100 future added 2.3% and all three major US indices are indicating a higher open.
The positive mood is also reflected in oil prices with Brent rebounding 3% after hitting the lowest level since July 2017 earlier in the day. These moves in risk assets came despite China’s manufacturing purchasing managers index falling to record lows in February.
Can central banks fight off coronavirus?
Ever since the global financial crisis, central banks have played a decisive role in restoring investors’ confidence and markets are wondering whether monetary policy will be successful once again.
In my opinion, the simple answer is no. The crisis we are currently facing is neither a financial nor a trade one. It’s a health crisis. Let’s assume the Fed cut interest rates to zero, the ECB moved deeper into negative territory and the BoJ resumed its asset purchase program. In addition, central banks became more creative with their Quantitative Easing programs. Will these measures encourage you to buy a new flat, a new car or even a new iPhone? Are you more confident in taking a vacation trip? Are you likely to consider expanding your business given the cheap liquidity? Most likely, the answer is no.
The current crisis facing the global economy is not due to a lack of cheap liquidity, but the absence of treatment to a virus that is spreading throughout the world, and no amount of monetary stimulus will return life to normal.
It’s almost impossible to know how much further risk assets may drop, but until we get evidence of the virus being contained, any upside may prove to be a dead cat bounce and the markets are likely to continue heading down.
Investors with cash may want to wait a little longer before they jump in, although markets may look attractive.
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