Indices across Europe have opened sharply lower on Thursday. The FTSE has plunged 5% and U.S. futures are also pointing a 5% drop when Wall Street opens later in the day.
Risk sentiment was initially hit when the World Health Organization (WHO) announced on Wednesday that coronavirus is now a global pandemic. Whilst this doesn’t automatically mean any change in policy response, as each country is responsible for their own policy, it does bring an extra layer of fear to the public and the markets.
Trump’s travel ban
Following on from the WHO pandemic announcement, President Trump announced a travel ban from mainland Europe to the U.S., in addition to a package of measures to support workers and businesses in an attempt to mitigate some of the strains on U.S. the economy. However, there was still no news on the payroll tax cut which needs to make its way through Congress.
Trump’s announcement shows that he is finally taking coronavirus seriously. The bold move on travel will have serious economic implications. Fortunately, he back peddled on including trade and cargo restrictions from Europe too.
Trump’s announcement came following a 50-basis point rate cut from the Federal Reserve last week and another rate cut expected next week.
It also comes following a coordinated approach from the BoE and the UK Government on Wednesday. Even then the FTSE closed the session 1.4% lower.
Improved virus prognoses needed
So far what we are seeing is that a coordinated approach from policy makers at the levels being offered is not calming the markets. Equity indices are trading in bear market territory, down 20% from recent highs. With fear driving these markets it would appear that we aren’t going to see any form of sustained turnaround until the prognosis of the virus improves and infections start declining,
ECB up next
Attention will now turn to the ECB. Contrary to the BoE and the Fed has not yet acted to counter the escalating crisis. However, the ECB has significantly less room to manoeuvre given the negative rates and current asset purchase programme.
The broad expectation is that the ECB will take action. The ECB are expected to make a 10-basis point rate cut taking it to -0.6%. They are also expected to increase asset purchases, or bond buying, to €40 billion per month. This will be the first real test for ECB Governor Christine Lagarde and she may have to sacrifice unity among policy makers in order to not underwhelm the market.
However, evidence has shown that big coordinated moves has failed to underpin the market so can a 10 basis point cut by the ECB really do anything? On the other hand, not acting could inject further fear into a very scared market.
