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Has this become a trend? Each time the markets are headed towards the correction territory, the economics desks of the buy-side and sell-side firms don’t waste time to propose further interest rate decisions.
Interest rates across major developed nations, which are trending at historically low levels, may not have enough room to ease in the event of a broader economic shock. It is more likely that the central bankers might need to invent new monetary policy tools in a bid to address the challenges in the years ahead.
However, the present coronavirus situation can have numerous implications, both known and unknown, including the current supply-side shocks from Chinese factories, which might have resulted in a broader scale supply-chain disruptions.
The Chinese companies, at present, are finding it hard to source labour which raises the possibilities of cost-pull inflation led by the below-average level of manufacturing capacity, especially for the necessities like staples. At the same time, it may imply that the discretionary spending from the Chinese households could be in jeopardy as individuals are advised to stay at home.
The disruptions are not just limited to China. The Australian education and travel sectors are adversely affected by the coronavirus outbreak as the Chinese demand weakened due travel bans for the time being.
As countries continue to take preventive measures like travel bans, the travel and leisure sectors could be hit further across the coronavirus-plagued jurisdictions. European regions have embraced the coronavirus outbreak, indicating the possibility of similar repercussions like China, as seen in China’s incoming economic data (PMI hitting all-time low). However, this would depend on the scale of the outbreak in Europe.
At the time of writing, Johns Hopkins CSSE shows that the total confirmed cases in Italy have reached 2,036. Spain has a total of 120 confirmed cases, and France has 191 confirmed cases. Also, Switzerland has 42 confirmed cases, Germany has 165 total confirmed cases, the Netherlands has 18 cases, and Norway has 25 confirmed cases.
In the UK, there are 40 confirmed coronavirus cases while and Ireland has confirmed one case. In the west, the US has 105 coronavirus cases, Canada has 27 cases, and Mexico has five confirmed cases.
Moreover, the global pandemic is upon us and policymakers are navigating these turbulent times with policy actions, including travel bans, interest-rate cuts, liquidity injections in markets, and health care awareness, among others.
Most of the efforts are directed towards containment of the deadly virus. However, the efforts are also aimed at keeping the global economy afloat while preventing it from the downside risks of a recession. However, no one knows whether there would be a recession in the foreseeable future or not.
As a legendary macroeconomist, Rüdiger Dornbusch puts it:
RBA moves 25 bps; markets end seven-day losing streak
At today’s March meeting (i.e. 03 March 2020), the RBA has lowered the cash rate by 25 bps, taking it to 0.50 per cent. Mr Lowe noted that the rate cut is in response to the global virus outbreak.
He mentioned that the outbreak has resulted in:
- a bleak outlook for global economic growth,
- lower yields on the long-term sovereign debt,
- hampering Australian travel and education sectors.
Therefore, it expects weaker than expected GDP growth for the March quarter. The RBA would continue to monitor the coronavirus situations closely and its implications on the economy.
In an immediate response to the cash rate cut, the Australian big four banks lowered their respective interest rates on variable rate mortgage products. This was also followed by other smaller banks passing on the rate cuts by the mortgage lenders/banks.
An immediate interest rate cut transition like this could proactively help the real economy monetarily, which seems entirely appropriate given that the coronavirus outbreak is hitting the real economy in the first place.
By the close of the trading session today, the benchmark index – S&P/ASX 200 was up 0.7% or 44.2 points at 6435.7 points. Stocks that were leading this upward move include Xero Limited (ASX:XRO), Bega Cheese (ASX:BGA), Clinuvel Pharmaceuticals (ASX:CUV), Afterpay Limited (ASX:APT) & Harvey Norman (ASX:HVN).
Source: ASX
On the other side, most losses were recorded in Perenti Global (ASX:PRN), Netwealth Limited (ASX:NWL), Jumbo Interactive (ASX:JIN), Virgin Money (ASX:VUK) & Mayne Pharma (ASX:MYX).
Related read: Coronavirus Blackswan Turns 3 Healthcare Stocks to Multibaggers: ZNO up 6x, BIT & HCT Up 2x
US markets expect interest rate cuts; stocks march higher
Overnight, in the US, the equity markets snapped their losing streak after a speech by Federal Reserve Chairman Jerome Powell released a statement on Friday. Although the statement was less than 50 words, the second-order implications have been material.
Ever since the statement has broken ground, the economics desks across the sell-side, as well as buy-side, have increased the possibility of a policy rate cut in the March meeting. And, the reaction of the US markets on Monday was quite reflective of this fact. On Monday, in the US, the S&P 500 index closed at 3.090.23, up 4.6% or 136.1 points, while the 30-share DJIA closed at 26,703.32 up 5.09% or 1,293.96 points.
Expect volatility…
John Maynard Keynes has put it like this:
If interest rate cuts were to solve a biological disorder like the lesser-known coronavirus, the markets might have reached much higher than the movement seen today.
Unfortunately, the coronavirus outbreak still exists, and there would be more news flow related to the economic implications, coronavirus cases, upgrades and downgrades by street analysts, companies altering outlooks etc. in the coming days.
Therefore, investors could expect some volatility in the markets given that the coronavirus situation is yet to peak in other nations that have been infected by the deadly virus. Or maybe the outbreak has already peaked in some countries other than China, including Italy, South Korea, & Iran.
