The extraordinary times continue with historically sharp declines in equity markets as well as a widening of spreads in credit and peripheral bond markets . The underlying driver has been the continued acceleration in the spread of the COVID-19 disease, which looks set to trigger a lockdown of most of Europe and the US within a matter of weeks . Oil prices have also collapsed to the lowest level in more than 15 years , causing distress for highly leveraged shale oil producers in the US. The negative growth impact of the lockdowns will be huge in the short term and possibly bigger than we have ever seen before. Our expectation is still that lockdowns will eventually work to contain the virus as we have seen in China and South Korea and that economic activity will recover in H2. However, we are in uncharted waters and the risk is that something will go wrong and that we could face a longer recession. The disease could come back in the autumn or a wave of bankruptcies could cripple the global financial system and thus the global economy. In our view, it is the policymakers’ role to ensure the latter does not happen .
Indeed, this week we saw a significant policy response ( for an overview see The Big Picture – Global fiscal and monetary responses to COVID-19 – update , 20 March). After disappointing badly last week, the ECB pulled out the big guns following an emergency call on Wednesday evening and launched a huge asset purchase programme of up to EUR750bn (see ECB Research – All in with EUR750bn package , 18 March). ECB President Christine Lagarde stated there was ‘no limit’ to the ECB’s commitment to the euro in wording that mirrored her predecessor Mario Draghi’s ‘whatever it takes’ words at the peak of the euro debt crisis in 2012. On the fiscal front, the individual euro area countries have also presented a range of individual packages, with the biggest fiscal easing since the global financial crisis in 2008/09 . On Monday next week, the Euro group finance ministers will have their weekly call but we do not expect to see any new initiatives for now, as much has been announced already.
In the US, policymakers also took decisive action to provide stimulus. On Sunday night, the Fed announced a rate cut of 100bp, taking rates close to zero, and an asset-purchase programme of government- and mortgage-backed securities of USD700bn. US Congress is also working on a big stimulus plan and we expect agreement on a USD1trn package involving direct cash payments of USD1000 to every American. The Bank of Japan announced a monetary boost on Monday pledging to buy risk assets such as exchange trade funds (ETFs) at double the pace it is currently doing.
On the data front, Chinese retail sales and industrial production declined significantly, with falls of 20.5% and 13.5%, respectively. The German ifo business survey and US Philadelphia survey numbers for March also plunged. We expect to see some more horrible numbers in the next two months and a big jump in unemployment. Last week, initial jobless claims increased by 70,000 people in a one-week climb previously seen only during strikes, hurricanes or other extraordinary circumstances. Despite all the stimulus announced, financial markets have continued to trade with a weak tone and it is not clear that risk sentiment will stabilise in the short term, as we expect the US and Europe to see a further sharp increase in COVID-19 infections in the short term (see COVID-19 Update – New jump in infections in US and Europe , 19 March).
