Major indices remained highly volatile as investors tried to assess the economic impact of covid-19. The S&P500 Vix index remain at elevated levels but is slightly improving. As the magnitude of the crisis unfolds, central banks around the world have cut rates and started large scale asset purchases. Meanwhile, the White House is working on a USD 2 trillion package (10% of GDP) to limit the damage and restart the growth engine.
Last week, the US FED dusted policy tools which were used during the 2008 financial crisis; it cut rates back to 0.25%, offered significant dollar liquidity through swap lines to central banks in Europe, Japan, England, China and Switzerland and further expanded this facility to 4 other central banks. Large scale asset purchases were boosted and the ECB also announced a package of EUR 700bn of bond buying which should be used first to stabilise yields in Italy. Further G7 coordinated action will be required to stabilize currency markets in the coming weeks but it is reassuring that there is consensus on the way forward. The need for bold action has also led Germany to question its previous red line of fiscal prudence and there are reports of an additional budget of EUR 150 bn (4.4% of GDP) which includes a EUR 100 bn package stabilisation fund to help struggling companies. The base for a U-turn recovery is taking shape even if much depends on how fast policymakers end the lockdowns. This in turn will depend on how quickly some existing drugs will be approved as a stop gap solution until a vaccine becomes available. After a slow start, it is a relief to see the scale and swiftness of the reaction of governments, corporations and the civil society to the health and economic threat posed by the virus across the world.
In the coming weeks, the health situation in Europe, the US and India which has a population of 1.2 billion people is set to worsen. Crucially, history shows that it is in these testing times that human ingenuity shines.
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23 March 2020
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