Spread of Covid 19 Virus Forces Central Bankers To Turn Dovish
After making a series of new record highs since the start of the year, risk assets fell into correction territory last week. The trigger was of course the outbreak of the covid-19 virus outside of China; the virus which propagates exponentially in its early stages provided a daily dose of negative news which affected investor sentiment.
According to Deutsche Bank Global Research, this was the fastest correction in history. If the virus had been only a Chinese issue, the impact would have been restricted to supply chain disruptions and an insignificant hit to global GDP growth. But its spread outside of China can lead to a drop in demand and this is what drove investor fears last week (see chart above – fear index breaks out). It should also be noted that the higher volumes seen last week are a result of algorithmic trading machines which exacerbated the drop.
Macroeconomic indicators in the US remained healthy with a substantial rise in new home sales in January, a rise in personal incomes and elevated consumer sentiment gauges. Fed Chairman Powell’s speech on Friday arrested the market decline as investors concluded that rates would be cut in March and possibly April.
Central bankers in Europe advocated fiscal expansion and a coordinated response by the G7 could be in the pipeline if the virus spreads. These are strong measures which will improve investor sentiment and equity indices are rallying this Monday. Still the medium term direction will be influenced by how well countries can contain the spread of the virus. Overall, a scenario whereby global economic growth slows down during the first half of the year and accelerates afterwards is looking likely.
Apart from the virus situation, this week investors will focus on Brexit talks, the US Democratic presidential candidate race and the jobs report which should still be supportive of growth.
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3 March 2020
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