Investors are looking to central banks and governments to stem the economic and financial fallout from the coronavirus pandemic. It’s not clear if they’re up to the task.
But the actions, which weren’t coordinated on a global scale, look unlikely to ease the panic that hangs over markets. Global stocks suffered their worst decline last week since the 2008 financial crisis, and the Dow is in a bear market despite Friday’s rally. Financial conditions remain strained.
Investors are waking up to the fact that central banks have limited tools to address an economic crisis after years of historically low interest rates and asset purchases. Actions by governments, meanwhile, have been announced intermittently amid fierce debate.
The big problem is that any monetary and fiscal measures will take some time to kick in, and won’t alleviate anxiety in the meantime.
“Cutting taxes and interest rates will have little if any immediate impact on an economy shutting down due to escalating quarantining,” Bank of America global economists Ethan Harris and Aditya Bhave told clients Friday.
Still to come: Central banks still have some ammunition left to fire — and they’re expected to do so this week. The Federal Reserve could cut interest rates to 0% even before its meeting on Wednesday. After years of negative interest rates, it’s not clear how much the Bank of Japan, which meets Thursday, can do.
“The macroeconomic and financial [condition] risks remain broadly unchanged, and the need for a significant amount of policy accommodation remains unchanged as well,” Morgan Stanley chief US economist Ellen Zentner said in a note to clients Friday.
Piles of corporate debt pose big risks to unstable markets
“This certainly is another match being lit [near] the bonfire of corporate debt liabilities,” Simon MacAdam, global economist at Capital Economics, told me. “There’s definitely potential for systemic risk.”
What’s happening: Investors became increasingly anxious about corporate debt in the past week as stocks sold off and crude prices nosedived. The ability to buy or sell securities in corporate debt markets has become much more difficult. And the extra returns that investors are demanding to hold corporate debt over more stable government bonds have shot up, signaling that they’re now viewed as much riskier holdings.
See here: Bank of America told clients on Friday that volatility had skyrocketed and outflows from corporate bond funds were at record highs.
Monday: New Bank of England governor; China retail sales data