Markets continue to sink into fears of coronaviruses, as even a rate cut of 50 basis points by the Federal Reserve last week did not reverse the situation. The Fed will meet again next week and many see further easing, but will these efforts prevent the recession?
“The stock markets are in freefall and it seems unlikely that central banks and short term governments will be able to do anything,” said Edward Moya, senior market analyst at OANDA. “Technical selling is getting ugly and even if expectations are high, the Fed will cut rates to zero, the retail investor will likely want to wait for this one.”
And reduced rates may not be everything. “Fears of viruses, deflationary risks and increasing stress in the credit markets mean that the markets will see the Fed launch a new QE program very soon,” he said.
“Ultimately, investors will start to run down on inventories, but it looks like the technical sale may remain ugly for a few more days,” said Moya. “The longer-term game book is likely to buy stocks again as markets move beyond the virus, adjust to lower oil prices and expect global anger that will likely remain in place over the next year. “
“Expect huge volatility,” said Steve Skancke, chief economic adviser at Keel Point. “The challenge for the markets is that currently we have both supply and demand in the face of global economies. The turmoil in the oil market has exacerbated supply, but is contributing to the cost of non-energy sector production and consumer spending. “
He sees the probability of an American recession “increasing”, the second and third quarters showing a contraction, “with a strong recovery thereafter”.
And, with signs that China is “slowly restarting production, the chances of a weaker, if not zero, US recession are also improving,” he said.
But “the financial markets will be more and more volatile as they wonder what oil production and price movements will add to the uncertainty surrounding corporate profits for the first half of 2020,” said Skancke.
Although there is still a week before the Federal Open Market Committee meets to discuss monetary policy, “there is a good chance” that the Fed will further cut rates by 50 basis points. “We will have to see where we are at the end of the week. If things stabilize, the Fed would not cut more than 25 basis points, if at all. “
Liquidity will be the biggest short-term risk, according to Colin Moore, global investment director at Columbia Threadneedle Investments. “If economic activity has slowed, cash flow has also slowed,” he said. “The focus on lowering interest rates is out of place. Central banks have a role to play, but governments must play a leading role in providing liquidity. “
While the risk of recession has increased “due to the short-term economic impacts of fear of COVID-19”, noted Moore, “However, the duration and depth of a recession, if it occurs, is likely to be quite short but can be deep in the most affected countries, such as China. “
Although recovery time varies across industries, “overall economic activity is not expected to be affected in the long term. For example, it will likely take much longer for tourism to pick up than visits to the local grocery / market. “
Nigel Green, CEO and founder of the deVere group, sees “the risk of a short and acute global recession is increasing, because” the epidemic is growing and evolving rapidly and no one can accurately predict what the economic impact will be. “
While demand has already been hit in “travel and tourism, hospitality, manufacturing and retail, and it will spread to others,” he warned.
“This scenario is then likely to feed on itself: a lack of consumer confidence and spending, a lack of business investment, more job cuts, which means even less spending and demand, which leads to further job cuts. ”
The Wells Fargo Investment Institute sees US economic growth affected “to a lesser extent than internationally” and reduced its 2020 American growth forecast to 1.5% from 2.1%. “Although the rate of coronavirus infections in the United States is not known with certainty, services – not manufactured products sold globally – are generally the most powerful economic engine in the United States. In addition, we believe that historically low interest rates should boost home sales. We do not expect an economic recession, but the first half of 2020 may be weaker than we had anticipated before the start of a recovery, perhaps in the second half of this year. “
Morgan Stanley researchers agree. “We expect global growth to drop to 2.3% Y in 1H20 as Covid-19 disrupts economic activity in the short term. But the political response has already moved into high gear and we see it picking up speed, which will help accelerate the recovery in 3Q20 as the effects of the disruptions fade. They see “more flexibility in the months to come.”
“The financial markets are in a state of panic and we may be on the brink of another global recession,” said Giles Coghlan, chief currency analyst at HYCM. “Leaving aside economic concerns, coronavirus is a problem precisely because no one knows when and how the pandemic will be resolved. For now, investors and traders should keep the same level and consider looking for safe haven assets that can maintain their value. Longer-term investors may view recent declines in stocks in the major indices as great long-term basement opportunities. “
In the United States, “financial conditions are now under stress … boosted by the collapse of oil prices, the widening of the credit spread and the increase in cases of coronavirus,” said Saumen Chattopadhyay, Carson group chief investment officer. “The fear is that market stress will hit economic growth while aggregate demand takes a hit with the pullback of businesses and consumers. After forcing the Federal Reserve to the first emergency rate cut since the financial crisis of 2008, a free fall of stocks on the panic of the recession raises the ex-probability of a fall of 50 bps in March to 44%, and the probability of a fall of 75 bps is 56%. is at 54, which corresponds to 3.5% of daily movements. It peaked at 62 shortly after opening. Its highest level in history was recorded in 2008, when the index reached 89.53. “