The US Federal Reserve made the dramatic announcement on Sunday that they were cutting interest rates almost to zero. And how did the markets react? Futures on the S&P 500, the barometer of global equities, plunged at the opening in Asian time, hitting limit down, at which point trading is suspended.
This followed a wave of action over the weekend by governments, most notably US state and local governments, to limit social interaction. Massive reductions in economic activity will follow. China, where the virus started of course, released data showing the intense damage to their economy. Events are moving swiftly and it is clear that some governments, notably in the UK, will have to do much more to contain the spread.
Amid the bleak headlines, we should not overlook examples that point to guarded optimism. South Korea, once an alarming outbreak zone, now appears to have the coronavirus outbreak relatively under control. Social distancing, school shutdowns, and mass testing resulted in new cases going from 586 on 1st March to a mere 76 on 15th March. China was initially in denial over the virus but then went into over-drive and demonstrates that strong action produces strong results.
Central banks have done what they can but the fiscal authorities must now act, and act swiftly. The UK has already announced bold measures to ease cash flow pressures on business and assist those who fall ill or are required to self-isolate. Despite their severe political differences, we expect the US Administration and Congress to take fiscal action too.
The immediate outlook for financial markets depends on two separate sets of forces. First, and most obviously, the spread of new cases. The virus seems to be under control in China and South Korea and the World Health Organisation has declared that Europe is now the epicentre of the epidemic. We need to see signs that the number of new cases in Italy are slowing. The second set of factors relate to the functioning of markets. The regulators will be watching closely to see that markets continue to function in these difficult times. The market declines have been so severe and swift that distress will be inevitable in some areas. Widespread liquidations have not been reported but they do remain a risk.
The fundamental supportive consideration is that the virus can and will be contained. Whatever the economic hardship caused in the process it should be temporary. Markets and economies will recover.
Should we see signs that the medical situation is stabilising, this could signal a buying opportunity into what should be a significant rally.