Can anything be done to save markets from coronavirus?

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The markets continue to sink on coronavirus fears, as even a 50 basis point rate cut by the Federal Reserve last week didn’t turn the markets around. The Fed meets again next week and many see more easing, but will those efforts prevent recession?

“Stock markets in freefall and it seems unlikely central banks and governments in the short-term can do anything,” said Edward Moya, senior market analyst at OANDA. “Technical selling is getting ugly and even though expectations are high the Fed will take rates to the zero bound, the retail investor will likely want to wait this one out.”

And cut rates may not be all. “Virus fears, deflationary risks, and growing stress in the credit markets, means markets will see the Fed launch a new QE program very soon,” he said.

“Eventually investors will start scaling back into stocks, but it seems the technical selling can remain ugly for a couple more days,” Moya said. “The longer-term playbook will likely to buy stocks again as markets will move beyond the virus, adjust to lower oil prices, and expect a wrath of global stimulus likely to remain in place over the next year.”

“Expect enormous volatility,” said Steve Skancke, chief economic advisor at Keel Point. “The challenge to markets is that currently, we have both a supply side and a demand side face punch to the global economies. The oil market turmoil exacerbated the supply side but helps the cost of non-energy sector production and consumer spending.”

He sees the likelihood of a U.S. recession “growing,” with the second and third quarters showing contraction, “with a sharp recovery thereafter.”

Steve Skancke
“The challenge to markets is that currently, we have both a supply side and a demand side face punch to the global economies," said Steve Skancke, chief economic advisor at Keel Point.

And, with signs China “is slowly restarting production, the chances of a U.S. recession being more shallow, if at all, are also improving,” he said.

But “financial markets will be increasingly volatile as they get their heads around what the oil production and price moves add to the uncertainty around corporate earnings for the first half it 2020,” Skancke said.

Although there’s still a week before the Federal Open Market Committee meets to discuss monetary policy, “there is a high probability” the Fed will lower rates another 50 basis points. “We will have to see where we are at the end of the week. If things settle down, the Fed would cut no more than 25 basis points, if at all.”

Liquidity will be the greatest short-term risk, according to Colin Moore, global chief investment officer at Columbia Threadneedle Investments. “If economic activity has slowed, then cash flow has also slowed,” he said. “The focus on interest rate cuts is misplaced. Central banks have a role to play, but governments must take a prominent role in providing liquidity.”

While the risk of recession increased “because of the short-term economic impacts of the fear of COVID-19,” Moore noted, “However, the duration and depth of a recession, if one occurs, is likely to be quite short abut may be deep in the most affected countries, like China.”

While recovery time will differ between industries, “aggregate economic activity is unlikely to be affected long term. As an example, it will probably take a lot longer for tourism to pick up than visits to the local grocery store/market.”

Nigel Green, chief executive and founder of deVere Group, sees a “short, sharp global recession risk is growing, as “The outbreak is developing and evolving quickly and no-one accurately can predict what will be the economic fallout.”

While demand has already been hit in “travel and tourism, hospitality, manufacturing and retail, and it is going to extend to others,” he warned.

“This scenario is then likely to feed on itself: a lack of consumer confidence and spending, lack of business investment, more job cuts, which means even less spending and demand, which leads to further job cuts.”

Wells Fargo Investment Institute sees U.S. economic growth affected “to a lesser degree than internationally,” and trimmed its 2020 U.S. growth forecast to 1.5% from 2.1%. “Although the rate of U.S. coronavirus infections is not known with certainty, services — not globally traded manufacturing goods — are typically the strongest U.S. economic driver. In addition, we believe interest rates at historically low levels should reinforce housing sales. We do not expect an economic recession, but the first half of 2020 could be weaker than we previously had expected, before a recovery begins, possibly in the latter half of this year.”

Morgan Stanley researchers agree. “We expect global growth to dip to 2.3%Y in 1H20, as Covid-19 disrupts near-term economic activity. But the policy response is already kicking into gear and we see it picking up speed, which will help to drive a recovery from 3Q20 as the effects of disruption fade.” They see “more easing in the coming months.”

“The financial markets are in a state of panic and we could be on the brink of another global recession,” said Giles Coghlan, chief currency analyst at HYCM. “Leaving the economic concerns to one side, the coronavirus is a problem precisely because no one is sure when and how the pandemic will be resolved. For now, investors and traders need to keep a level-head and consider looking to safe haven assets that can hold their value. Longer term investors may consider the recent equity falls in the major indices as great bargain basement opportunities in the longer term.”

U.S. "financial conditions are now under stress … spurred by the oil-price collapse, widening of credit spread, and growing cases of coronavirus," said Saumen Chattopadhyay, Carson Group chief investment officer. "The fear is that market stress will hit economic growth while aggregate demand takes a hit with business and consumers retreating. Having forced the Federal Reserve into first emergency rate cut since the 2008 financial crisis, a freefall in stocks on recession panic is raising the ex-ante probability of a 50 bps cut in March to 44%, and the probability of a 75 bps cut is 56%. The VIX is at 54, which translates to 3.5% daily moves. It hit a high of 62 soon after the open. Its highest level in history was in 2008, when the index touched 89.53."

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