9th March 2020
Coronavirus market update – ramping up countermeasures can be scary
Since our last update a week ago, market dynamics have developed very much along the lines we outlined as our expectation. The US Federal Reserve has taken the lead and lowered US interest rates by 0.5% to provide additional monetary stimulus to counter the economic pressures the virus containment actions inflict on economic activity levels worldwide. Western governments have not only taken decisive steps to prevent an uncontrolled spreading of the virus, but are also standing at the ready to mobilise fiscal spending programs to get the global economy back on track, once the worst has passed.
Stock markets in the meantime have done precisely what we suggested and have ricocheted wildly between recovering stunningly, falling precipitously and recovering again, thereby providing the financial media outlets with plenty of headline-grabbing record numbers.
Fed follows its script – no ‘shock and awe’ intended
The US Federal Reserve opted for decisive and swift action this week, when its Federal Open Market Committee announced on Tuesday that it would immediately be cutting the fed funds rate by 50 basis points to a range of 1% – 1.25%. In the words of Chair Jerome Powell: “we saw a risk to the outlook for the economy and chose to act.”
The response from markets was decidedly volatile. Initially the S&P rallied 8% from last Friday’s intra-day low, before backing off a further 4%, to end the day lower. The problem, of course is that loosening monetary policy isn’t a potential cure for a global pandemic. Lower interest rates in themselves don’t instil confidence, and we are living in a time when confidence (or lack of) is driving investor sentiment.
US presidential primaries: ‘Joe-mentum’ arrives
Meanwhile, November’s US Presidential Election match-up started to take shape, as former Vice President Joe Biden emerged as the big winner from the Super Tuesday primaries. So far, forecasts have Biden capturing 10 states, including Texas, whereas his closest rival Bernie Sanders took three states and also appears likely to capture California, the state offering the highest number of delegates.
Biden’s return to front-runner status was all but assured in the beginning of the week, when two of the more centrist Democratic challengers in the race, Mayor Pete Buttigieg and Senator Amy Klobuchar, dropped out of the race and pledged their endorsement to Biden.
Erdogan’s brinkmanship raises tensions across Europe
Somewhat lost in the COVID-19 noise and distraction, President Erdogan significantly increased pressure on Europe over the past week, by allowing Syrian refugees to attempt to cross into Greece without restraint. It may be that its timing (in seeking aid from Europe) is not great, given the rapidly rising economic pressure from COVID-19. However, European leaders and the wider NATO alliance will be concerned that Turkey is being driven further towards Russia.
And yet, the burgeoning relationship between Russia and Turkey hit a decidedly difficult patch after Erdogan’s opportunistic military campaign on the Syrian border. Erdogan has been increasingly isolated on all sides, after committing his troops to an unwinnable ground offensive against Bashar al-Assad’s regime and threatening to draw Turkey into military conflict with Russia. This week, Erdogan appeared to be pushing Turkey deeper into the Syrian quagmire, and moving it closer to the brink of disaster and humiliation.