Can Policymakers Limit The Infection Rate?

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During last week, stocks rebouded from 3 year lows; on Tuesday the DJIA had its best day since 1933 and the S&P500 since 2008. Energy prices recovered after US officials pressured S. Arabia to end its price war against Russia and airline shares bounced back after reports of a USD 60 billion bailout package for the industry. Boeing shares led gains for the industrial sector. Changes in spending patterns are also being noted during lockdowns. Going forward, a sustainable rebound in risk assets remains dependent on 3 factors; have policymakers provided a backstop for investor fears? Are we making progress on the medical and scientific front and what will be the economic impact of confinement measures?

On the issue of investor fears, the US FED has announced (i) unlimited asset purchases (ii) purchase of corporate bonds from primary market, i.e., direct purchases (iii) purchase of outstanding corporate bonds and (iv) term asset-backed security loans facility which will help auto loans, student loans and equipment loans. In addition, the US Senate approved a historic 2 trillion spending package which includes (i) USD 500 billion in direct payments to households (ii) an equivalent amount to large corporates (iii) USD 350 bn in loans to small business (iv) USD 350 billion in tax cuts (v) USD 150 bn in funding for hospitals. Across the pond, Euro Area countries have committed to fiscal easing of 2.5% and liquidity of 11.5% of GDP to struggling corporations. Furthermore the ECB implemented the Pandemic Emergency Purchase Program, a game changer as the bank will no longer be constrained by capitalisation rules of member states. It’s fair to say that these measures have reassured investors for now.

Policymakers are catching up on the medical front at great speed with technological innovations but still need to assess why South-Korea, Singapore or Hong-Kong have obtained better medical results at lesser economic costs. Hence the duration of lockdown periods and management of a possible second wave of lockdowns depends on a rethink of policy action. The trajectory of the rate of infections for major economies remains alarming (chart above) and will affect consumer and business confidence. But the capacity of policymakers and economic agents to limit the damage to a U-turn recovery should not be underestimated.

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30 March 2020

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