The global risk sell-off is picking up momentum on worries that the post-coronavirus economic recovery may be bumpy due to renewed contagion waves and that the tensions between the US and China could further dent the world economy from gaining a healthy pace of recovery.
The UN warned that the coronavirus crisis could shed four years of growth and push 130 million people into extreme poverty. If the business reopening plans fail worldwide, these numbers could shoot up and paint an uglier economic picture for the decade to come.
And the central banks are sending out an SOS. In his speech yesterday, the Federal Reserve (Fed) Chair Jerome Powell warned of a prolonged period of recession from pandemic and asked the White House to deploy more fiscal stimulus to fight against the implications of a severe economic downturn. The US government, on the other hand, already loosened its purse’s strings to allow a record spending to help American businesses to navigate through hard times. And both the US government and the Fed will certainly push for more stimulus on fiscal and monetary fronts to support the US economy, that’s not the problem. The problem is, if Powell starts sending the ball to the White House camp, then it gives a message that the Fed may also be running out of ammunition. The Fed could still act beyond sovereign debt purchases: it could opt for negative interest rates and include company stocks to its massive holdings after having already slashed its interest rates near zero and pledged to buy an illimited amount of government debt. But in the immediate future it is better to keep the current joint-stimulus setting: the government issues debt, the Fed prints cash to buy it. It is a winning blend; investors love it and crave for more.
The S&P500 (-1.95%), the Dow (-2.17%) and Nasdaq (-1.55%) fell on upsetting news that the coronavirus will continue taking a toll on economies for longer than thought, and a limited kneejerk response from the Fed and the White House. One bad thing about the stimulus measures is that they give a temporary relief to investors, but the anesthesia doesn’t last. Investors always need more stimulus, while the back-to-back fiscal and monetary stimulus measures increasingly weigh on the Fed’s balance sheet and the federal budget.
If investors are not given an additional dose of stimulus, the market rout could deepen.
The Bank of England (BoE) Bailey is rolling up his sleeves to buy more sovereign debt to finance the increased government spending, he told ITV news on Wednesday.
But Bailey’s commitment to aggressive bond purchases couldn’t better the investor mood in the FTSE stocks. Activity in FTSE futures (-0.92%) hints at a bearish start on Thursday. Cable slides in a lower-highs lower-lows pattern and is preparing to clear the 1.22-support. A further dovish shift in the BoE’s stance could give support to British stocks, but also the pound near the 1.20 mark against the greenback on prospects of a softer economic damage following the coronavirus-led financial chaos. But Brexit uncertainties and the rising possibility of a no-deal EU divorce should continue haunting investors.
By Ipek Ozkardeskaya
