Bloomberg.- The guardians of the world economy are in a two-front war. They are having to defend businesses and consumers that suddenly look frighteningly vulnerable to the coronavirus — and contain a rout on financial markets that threatens to make things even worse.
Those battles amid a unique pandemic this week forced political leaders and central bankers into action at a pace that puts even that of the 2008 financial crisis in the shade. Their economies are on course to post historic slumps in output over the coming weeks, a prospect that is panicking investors.
After a week of turbulence, markets showed flickers of optimism Friday. It’s a positive sign, but if investors, executives and the general public can’t be persuaded that there’s light at the end of the tunnel for the U.S. and Europe in the second half of this year, then they risk turning darker scenarios into self-fulfilling prophecies – and pushing the world into a deeper downturn and perhaps even a Depression.
Among monetary policy makers, the state of red-alert began on Sunday night with Jerome Powell chairing an unscheduled Federal Reserve meeting – the first of several that officials would have to convene and sign off in a hurry on new emergency moves.
“Monetary policy decisions at midnight,” said Torsten Slok, Deutsche Bank AG’s chief economist, “tells you how serious they are about trying to stabilize things.”
Then on Monday, with stocks still sliding and volatility elevated despite the Fed cutting interest rates, Group of Seven chiefs leapt into the fray — concluding a rare teleconference with a pledge to do “whatever is necessary.”
Exactly what that may be, the world still can’t say for sure.
As the week draws to an end, an unprecedented 31 central banks have slashed interest rates — and many of them have gone further and activated the crisis playbook, buying bonds, intervening in currency markets and setting up emergency loan programs for banks and companies. The aim: keep markets functioning and facilitate a recovery when life returns a normal.
In under a week, the Fed has cut its key interest rate by 100 basis points to near zero, resurrected an emergency financing facility and set up a string of programs that make it a player in the markets for government bonds, mortgage-backed securities, commercial paper and mutual funds. That’s as well as its attempt to supply dollars.
For European Central Bank President Christine Lagarde and colleagues, priorities were a bit different – including a spike in government-bond yields for countries like Italy, where budget deficits are about to explode. Meeting into the Frankfurt night on Thursday, they unveiled a 750 billion euro bond-buying program and declared there are “no limits” on what they would do to protect the euro.
Bank of Japan Governor Haruhiko Kuroda doubled a program of asset purchases and the Reserve Bank of Australia said it would join the QE club for the first time and begin targeting a yield of 0.25% for the three-year bond. It also cut its benchmark interest rate to that level.
Counterparts from South Korea and Poland to Ghana and Canada all cut rates, leaving Morgan Stanley’s measure of the world’s average interest rate close to zero — and less than half of its level of December.
The politicians in charge of budgets – earlier criticized for being slow to realize that their nations were as vulnerable to the pandemic as China – were finally hitting the accelerator too.
They needed to given central banks lack room to do much more and fiscal policy can move faster and be better targeted, helping to fill the widening hole in economic output. They can also afford to too given low borrowing costs and the theory it will save money later if it helps avoid a long recession.
Governments have now lined up a dizzying run of fiscal stimulus measures, already worth more than $3 trillion and rising fast, from tax cuts to new welfare programs and loan guarantees.
President Donald Trump acknowledged the need to “go big,” and is pushing a $1.3 trillion package that will include checks in the mail and bailouts in industries like airlines, where business has ground to a halt.
The details varied, but substantial programs were being rolled out in Paris and London – where Trump’s counterparts, Emmanuel Macron and Boris Johnson, were joining the U.S. president in adopting the language of wartime. German Chancellor Angela Merkel even abandoned a balanced-budget commitment.
The numbers say they’re right to.
“This is likely to be the biggest public sector mobilization in a single week — as a percentage of gross domestic product — since World War II,” said David Mann, chief economist for Standard Chartered Plc. “At least for the U.S. and Europe.”
And if the scale of policy plans evokes such historic comparisons, so does the juddering halt in commerce.
JPMorgan Chase & Co. is telling clients to brace for a 40% slump in Chinese output in the first quarter, followed by 14% drop in the U.S. over the subsequent three months – figures not seen for at least a half-century.
The full-year estimates don’t look as alarming, because the epidemic is expected to peak and then ebb. Still, JPMorgan’s economists expect world output to shrink 1.1% in 2020, worse than the 0.8% drop posted during the recession year of 2009, though their Wall Street counterparts are a bit more optimistic.
In Australia, which rode out the last crisis without slipping into recession, Goldman Sachs Group Inc. now forecast the sharpest annual GDP contraction since the great depression of the 1920s.
Much will depend on the acquiescence of markets that repeatedly questioned or worked against rescue efforts.
As if economies hitting a wall wasn’t bad enough, traders were beset with other risks. A recently erupted oil-price war drove energy prices down. Work-from-home regimes were sapping liquidity, and giant price swings were forcing liquidations — creating the conditions for a vicious downward spiral.
The week’s first day on equity markets began badly – and ended worse, as Trump’s afternoon warning that virus disruption could last into summer sent the S&P 500 careening into a 12% decline, the worst since 1987. And the whipsaw effect has dominated every day since.
Bonds were scarcely less volatile. They tumbled when governments unveiled plans to spend vast amounts of cash – and rallied when central banks pledged to buy swaths of the resulting debt.
Credit markets were pricing in higher default risks, even as officials were trying to prevent a funding crunch by freeing up space on dealers’ balance sheets. The oil war ensured commodities kept sliding.
The situation found ways to get worse. Foreign exchange markets came under strain amid an inexorable rise in demand for the dollar. Some central banks were forced to intervene – and the most powerful among them, the Fed, worked across borders to ensure flows of the world’s reserve currency.
If there’s doubt whether such a broad-based policy salvo will succeed, that’s because none of its components – chiefly, more spending and lower interest rates – amount to a vaccine against a deadly epidemic. Market stress will likely persist until the global rates of infection stabilize.
As the week wore on, there was a few encouraging signs. China, where 80,000 people have been infected, on Thursday reported no new domestic cases for the first time since the start of the crisis. Still, its markets sank.
There’s no parallel for this frenzied pace even in the crisis of 2008 –the benchmark for end-of-the-world sentiment among most people on the markets today. Several months separated that year’s Fed action and the launch of a rescue program for troubled assets. G-20 leaders didn’t really show common resolve until April 2009.
“The only real policy that can win the day against the virus is something that makes it safe for people to return to work,” said Wall Street strategist David Zervos. “Short of this, the virus will just keep winning and the policies will only work to minimize the bloodletting.”
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