Following on from last week’s panic-driven sell off in equity markets on renewed coronavirus fears, in recent days, central banks and governments have stepped up efforts to offset economic disruption caused by the outbreak. Finance Ministers from the richest nations and their central bankers held a rare emergency conference call yesterday in which they pledged to do whatever it takes to support a global economy under threat from the COVID-19 virus.
The response had already started in some countries, with Australia’s central bank cutting its key interest rate by 25 basis points, while Malaysia also eased policy. Italy pledged tax relief for businesses and Hong Kong offered cash handouts to consumers in efforts to temporarily prop up companies and consumers. Yesterday, with the pain from weeks of stalled output in China starting to feed through into declining global trade data, the US Federal Reserve sprung into action, cutting its benchmark interest rate by 50 basis points. This represents the biggest rate cut and the first outside of scheduled meetings since the crisis year of 2008. Other central banks are expected to follow suit in the coming weeks as larger spillovers from the virus outbreak are expected to feed into growth forecasts.
Alongside mounting calls for central bankers to act to loosen monetary conditions, governments struggling to contain the global economic fallout from the virus face pressure to unleash a major fiscal stimulus which would help cushion the economic blow. The exponential rise in the number of virus cases outside of China mean that consumers are becoming increasingly concerned about the impact a widespread outbreak would have on their everyday lives.
How Effective Is The Fed’s Rate Cut?
Although stock markets were initially lifted by the Fed’s emergency stimulus action yesterday, US equities declined over the trading session as the cut alarmed investors given the lack of response from other G7 central banks and lack of a co-ordinated fiscal stimulus, with America’s fiscal authorities seemingly missing in action.
Given the scale of the virus outbreak, it is argued that fiscal responses would be much more effective in stimulating spending and maintaining economic momentum in the first half of the year by supporting healthcare services and providing relief to workers and businesses. US Treasury Secretary Steven Mnuchin noted yesterday that “all tools are on the table” but offered little other action at this stage, with both democrats and republicans arguing that it is too soon to consider stimulus measures. The economic impact to the US has been limited thus far, and stimulus currently being considered is designed to help public health authorities combat the virus, not the economy.
Essentially, while the market reaction during yesterday’s trading session was negative, the Fed’s action puts pressure on other central banks and governments around the world to tackle expected negative economic impacts in a co-ordinated response to support global growth. US markets opened higher today as investors re-assessed the impact of Fed stimulus, while Joe Biden’s success on “Super Tuesday” provided a lift to equities.
For more information on Super Tuesday developments and how this effects the political landscape going into the 2020 US Election, please see the attached Market Update document.
The UK Response
Governor of the Bank of England Mark Carney has this week signalled that the Bank of England (BoE) is prepared to cut interest rates and allow banks to use “rainy day” funds to soften the impact of the coronavirus outbreak on the UK economy. The governor noted that the central bank’s role was to “help UK businesses and households manage through an economic shock that could prove large but will ultimately be temporary”. This supports our expectations that disruption is likely to be limited to the first half of the year, before a rebound in activity in the second half. Carney did not rule out a rate cut prior to the next MPC meeting at the end of this month.
Andrew Bailey, who takes over as governor of the BoE in less than two weeks, made his first public appearance connected to the new role today, giving us an insight into his policy stance. He called for collective UK action to tackle the virus threat, highlighting the need for co-ordinated fiscal action alongside BoE action. The Fed move is likely to have put pressure on the BoE to act to support growth and markets in the near term, and Bailey’s comments today have contributed to speculation of a rate cut in the coming weeks. Expectations are that the MPC will cut rates by 25-50 basis points at the March meeting, if not before.
Over the week, markets continued to display significant volatility in intra-day movements, however in recent days, we have seen signs of a potential stabilisation and recovery in equity markets, allowing us to regain some ground following the sharp sell-off experienced in the final week of February. Markets have been boosted in recent days by expectations that fiscal and monetary stimulus will help to offset economic disruption resulting from the coronavirus outbreak. We expect to see further stimulus announcements in the coming weeks, suggesting that the recovery could continue while we continue to see signs that governments and central banks will be taking action.
Although it now appears likely that the COVID-19 virus will continue to spread in the coming weeks, it remains our view that the economic impact will be temporary and limited to the first half of the year, as governments and central banks continue to support economic growth and markets.
Despite this, we see further volatility ahead in markets, particularly as the impact of stimulus fades and we start to get softer data feeding through into corporate earnings and valuations. For this reason, we will be watching market movements very closely this week to ascertain whether the stabilisation seen in recent days is sustained, and may look to temporarily reduce risk further down the line should disruption risks continue to increase as stimulus optimism fades.
Key Events We Are Watching This Week:
- Friday: US jobs data for Feb
- Saturday: China Import/Export data for Jan-Feb
Model Portfolios & Indices
Following the sell off at the end of February, markets have shown signs of stabilization in recent days, offsetting some of the decline seen earlier in the week. Due to portfolio diversification, we have not moved anywhere near as negatively as the indices. We do expect the markets to calm down, and therefore remain invested as we expect to see further efforts from governments and central banks to prop up markets. The recent drop in portfolios and indices is hugely disappointing, however we remain optimistic given market movements so far this week. Please note that the benchmark performance is a day lagged, therefore does not yet include yesterday’s decline in US markets.
Please note that the YTD data in the table below reflects performance from the start of the new year.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the day’s movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.
Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1789, the first Congress of the United States met in New York and declared the Constitution into effect. The US Constitution is the longest surviving written charter of government.
Have a great week,
Jason & Gina