By Deepta Bolaky
Another wave of monetary easing policy hit the financial markets. Investors were in a state of panic gripped by fears of a supply and demand shock over the wider spread of the coronavirus.
Source: Bloomberg Terminal
Supply chain disruptions were initially supposed to be short-term until the virus was brought under control. However, the number of new virus cases across borders despite the ramping efforts to contain the spread does not inspire hope that global growth would follow a swift V-shaped trajectory.
Demand is expected to take a hit as well as the widespread of the virus, stringent quarantine measures and travel curbs meant people are concerned and reluctant to shop, travel, and dine out.
In a rare coordinated move, G7 Finance Ministers and Central Bank Governors decided to jointly use monetary and fiscal tools to counter the possible impact of the COVID-19 on the world’s economy.
The statement shows that the richest nations are strengthening efforts to take further unified actions to address the human tragedy and economic challenge posed by the virus.
Even though there is a lack of details on the measures that will be put in place, the mandate brought a degree of calm as investors are holding on to the hopes that there are synchronized global efforts.
The Reserve Bank of Australia and the Federal Reserve were among the first central bankers to slash interest rates in response to the virus risks.
The RBA delivered a 25-basis point rate cut on Tuesday and set the tone for other central banks. However, the optimism quickly died down as investors became less convinced that rate cuts alone might not help to fix the risks behind a global pandemic. The expectations of quantitative easing also rose in the last couple of days.
The Fed later that day delivered its first emergency cut of 50-basis points since the 2008 financial crisis and brought more panic on the magnitude of the coronavirus impact on the economy.
Given that central bankers already have limited room for intervention, deploying monetary policies measures to tackle a global outbreak was not convincing enough. Fiscal measures in the G7 statement were the focal point that helped the markets to recover a semblance of normality.
The presidential race has now taken an interesting turning point after the Super Tuesday. Among the dozen democratic candidates, the race is now down to two contenders:
Joe Biden, a former vice president under the Barack Obama administration is the front-runner to challenge Donald Trump for the 2020 presidential election.
Bernie Sanders, Vermont Senator who previously built a strong campaign against Hilary Clinton in the 2016 race, is popular among the young but the turnout hoped for did not materialise.
There is one distinct factor between the two candidates. Joe Biden is running a campaign tied with his experience under the Obama administration while Bernie Sanders is known for its anti-establishment campaign.
Even though former President Barack Obama has not endorsed anyone for the 2020 campaign so far, a video circulated by Bernie Sanders’ campaign to imply that the former president has endorsed him shocked voters as it undermines what the candidate normally vows for.
In that respect, Joe Biden’s moderate position compared to Bernie Sanders is considered more market-friendly.
It was a roller coaster ride for the equities market as the drumbeat of bad news created panic. The fear factor in the market right now is the impact of the coronavirus on an already sluggish economy stuck in a record low levels of interest rate environment.
We saw an impressive rebound on Monday due to the heightened expectations of further rate cuts even though monetary policy intervention was unlikely going to be effective to tackle a global epidemic. The G7 statement reset the tone as investors finally saw that finance ministers and central banks governors stand ready to respond with both monetary and fiscal policy.
The statement put a floor under the freefall in the stock market and helped major equity benchmarks to rebound from correction territories.
Source: Bloomberg Terminal
The US dollar lost its appeal this week as a 50-basis point rate cut triggered a sell-off. Major currencies were mostly stronger against the greenback as the Fed was the first central bank among its peers to deliver an emergency rate cut.
However, the US economy remains more resilient compared to other major economies. As other central bankers start to ease monetary policies, the US dollar is likely to firm. The greenback finds support on its haven status and a stronger economy.
Source: Bloomberg Terminal
The RBA cut was mostly overlooked because:
The Aussie dollar was slightly firmer and buying at 66 US cents towards the end of the week.
The Canadian dollar was unable to bolster higher on the back of a weaker US dollar as the Bank of Canada delivered a half-point cut in the face of the coronavirus threat.
Rather than the action in itself, it is the swift action that has calmed nerves. We expect the attention to switch to whether the forthcoming measures are the Right Moves!
|Monday, 09 March 2020 |
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