US stock futures sank past 4% after the Dow closed 5.86% down in New York as Donald Trump’s public address fell short of what investors were hoping for. Trump suspended travels to Europe for the next 30 days – further hitting the transport industry, announced financial support to those affected by the virus and promised to ‘provide capital and liquidity’ to small business. There was little detail on payroll tax cut.
Meanwhile, the WHO declared the coronavirus a global pandemic.
As Trump said ‘this is not a financial crisis’ but it is on the verge of becoming one of the severest economic meltdowns we have experienced over the past decades and unfortunately, the arms we have in disposition to combat a regular financial crisis doesn’t seem to work in this particular situation. This is because proposed financial measures aim boosting activity at a time companies slow down operations to prevent further contagion. In this sense, we are not sure that companies could or would benefit fully from the massive monetary measures deployed by central banks in panic. Cheap lending is clearly not the answer to the specific problem we are facing today. Massive rate cuts have the effect of a sword cutting through the water. It appears that pulling out the heavy artillery doesn’t do much, other than narrowing central banks’ capacity to deal with the crisis when the time is right. This is why fiscal packages make more sense to contain panic in the short term, but actions on that end remain weak to satisfy investors.
Equities in Sydney tanked more than 7%, as Nikkei and Hang Seng slumped 4.41% and 3.38% respectively. WTI dived past 5% to $30 a barrel.
The negative correlation between gold and risk assets broke again. Gold provided no protection to investors as the price of an ounce slipped to $1630 in the overnight trading session.
The FTSE 100 is poised for a deep dive at the open, the energy-heavy index could test the 5500p on the downside, although the UK was doped with a powerful cocktail of monetary and fiscal stimulus on Wednesday. The pound fell, after the Bank of England (BoE) cut the interest rates by 50-basis-point cut and announced additional stimulus measures to incentivize banks to lend more. The announcement of a 30-billion-pound fiscal package to combat the coronavirus shock on the economy bettered the mood in sterling by improving growth and spending prospects. But Cable tested the 1.28 support twice; the third one could be a success and encourage a further fall toward the 200-day moving average (1.2720). On a side note, investors had little hint on Johnson’s plans to assure a smooth Brexit, as the coronavirus measures took the center stage at yesterday’s statement.
Today, the European Central Bank (ECB) chief Christine Lagarde is preparing to unveil her plans to fight the coronavirus-driven economic slowdown in the Eurozone. The measures could include a 10-basis-point rate cut, increasing bond issue limits on APP, deploying targeted liquidity below main refinancing rate and expaningd long-term negative-rate loans to small and medium sized businesses and households to help them dealing with drying liquidity and to give a boost to subdued activity. The euro slipped to 1.1250 against the US dollar and will likely remain under pressure on the run-up to the ECB decision.
On the other hand, Lagarde reiterated that central banks’ joint efforts would only have a meaningful impact if governments acted in tandem. While her predecessor Mario Draghi remained powerless getting the European governments to support the ECB with adequate fiscal measures, things may be different this time around. Officials of countries hit by the coronavirus outbreak have already started rolling up their sleeves. Last decade’s austerity measures are no longer, and EU countries are considering a coordinated action. France declared a situation of ‘force majeure’ and Italy announced a 25-billion-euro package to help its economy combat the virus.
But what the ECB really needs is the support of the Germans. Berlin kept silent so far, suggesting that a fullhearted German support may not come as easily, if the virus doesn’t pause a threat to Germany, as well.
Finally, inflation in the US eased to 2.3% in February from 2.5% printed a month earlier. Softer inflation didn’t mean much to investors, who have been pricing in another sizeable rate action at next week’s FOMC meeting regardless of the economic data. The dollar demand remained weak.
