Coronavirus panic prompts calls for stimulus
It was a dramatic day on financial markets worldwide and across all assets on Monday, prompted by fears of a further spreading coronavirus and a massive drop of 30% in oil prices following the collapse of the OPEC+ alliance that had contained global crude overproduction.
US stocks briefly plunged more than 7% and triggered a trading halt at Wall Street aimed at calming investors' nerves, after a stocks sell-off earlier in the day had already rippled through markets in Europe and Asia. In the flight for safety, US Treasuries across the yield curve dropped below 1% for the first time in history.
With US financial conditions now the tightest since 2011, fears are mounting that financial market stress would drag down economies around the world just when demand and supply shortages are already weighing heavily on businesses and consumers during the current coronavirus crisis.
Peter Cardillo, chief market economist at Spartan Capital Securities in New York, thinks that financial markets are close to entering bear market territory which would be another sign of a global economic downturn.
"This is basically panic selling created by the sharp drop in oil prices. There's a lot of fear in the market and if the price of oil continues to move lower it's an indication that a global recession is not far away," he told the news agency Reuters.
The crash on Monday, if sustained, would upend politics and budgets around the world, as it worsens existing strains in credit markets. It is adding pressure on central bankers to try and avert a global recession.
Act now to prevent a disaster
Economists like Cardillo are now expecting central banks in the major economies to come to the rescue. Deutsche Bank's global head of currency research George Saravelos even proposes fiscal stimulus "on the order of magnitude of the Lehman crisis, above 1% of global GDP."
In a note on Monday, he said central banks should "offer to buy risky assets including equities and corporate bonds, at least temporarily, and as soon as this week" to ease liquidity risks in markets.
Last week, the US Federal Reserve was already forced into its first emergency rate cut since the 2008 crisis amid growing panic in financial markets about the coronavirus outbreak. Evercore ISI strategists believe that the Fed and the Trump administration cannot afford to wait any longer with a stimulus package while "everyone is panicking" amid increasing market risk.
Investors won't focus on any positive signs from a potential recovery in Chinese production to attractive valuations "until they have confidence that the US government and Fed will 'do what it takes' to lower tail risk," they said in a note on Monday.
Fresh stimulus in the making
Under efforts to blunt the economic fallout from the virus crisis, US President Donald Trump on Monday was said to be readying stimulus measures. As American history has shown that no president has ever been reelected during a recession, Trump is expected to announce a temporary expansion of paid sick leave and possible help for companies facing disruption from the outbreak.
In addition, the Fed has announced that it will boost this week's repo operations to relieve money markets. Soon markets might also see another rate cut by the central bank, analysts believe, as last week's 50% emergency reduction failed to inspire confidence.
Ian Shepherdson, founder of Pantheon Macroeconomics, said on Twitter rising coronavirus cases in the US could see the Fed cut rates to zero and a $1 trillion (€870 billion) stimulus package.
However, there are also warnings about the consequences of a new round of quantitative easing, especially for credit markets. "This could cause some real disorders in the credit markets, and with the Dow moving into bear market territory, we could see levels in the indices going even lower," says Peter Cardillo.
And Peter Garnry, head of equity strategy at Saxo Bank, believes that the oil price war and COVID-19 have the potential to create a full-blown credit crisis. "If fiscal expansion comes with explicit guarantee from the central bank to backstop any funding required then you basically have the closest you get to ‘helicopter money',” he said in a note, adding that investors, in the meantime, should potentially brace for the Treasury curve to fall to near zero with the S&P 500 tumbling further.