Coronavirus stimulus: The UK responds, while markets wait on EU and U.S.
Global financial markets are eagerly awaiting an announcement with regard to the type of fiscal support the U.S. and other governments will bring to the table. This support will be aimed at preventing potential temporary economic headwinds from becoming more permanent impairments to the global economy.
In other words, what are governments going to do to ensure that small businesses and the industries most impacted by the steps taken to prevent the spread of the virus do not go out of business? In the U.S., there will likely be many taxpayers who will not be entirely comfortable with the notion of bailing out these businesses. To be clear, the reason governments will do this will not be to save shareholder value, but to save jobs.
Put quite simply, companies failing and people losing their jobs is the exact type of structural impairment to future economic activity the markets believe should be avoided. While we are confident that these types of fiscal measures are coming in the U.S.—as they already have in other countries—investors may not patiently wait. At this point, along with controlling the virus, we believe targeted fiscal support would have the most positive impact, from a market perspective.
Bank of England cuts rates, UK announces stimulus package
Significant policy responses from several countries have been announced this week.
In Canada, the Bank of Canada lowered its benchmark interest rate by 50 basis points and indicated it could cut rates further if necessary. The federal government introduced a C$1.1 billion package of new measures geared to help support provincial health systems and reduce the financial burden on workers quarantined due to the virus.
The most meaningful response came out of the United Kingdom. On Wednesday the Bank of England cut its overnight rate by 50 basis points and UK finance minister Rishi Sunak announced an additional US$39 billion of fiscal stimulus aimed at countering the negative effects of the coronavirus. It is a three-pronged approach consisting of:
- National Health Services funding
- Direct support of affected individuals, including government paid sick leave
- Targeted support for small businesses
We expect a similar plan to come out of other countries. The U.S. has already announced US$8.9 billion to fight the virus itself, and we also expect to see other measures of individual and small business support. But we believe more is needed on other fronts at a large-scale level.
ECB preparing significant stimulus package
On the monetary policy standpoint, in addition to the Bank of England’s rate cut, the new president of the European Central Bank, Christine Lagarde said the bank is preparing a significant stimulus package. Details are still to come, and we believe they will likely be announced this week.
However, Lagarde did remark that Europe “will see a scenario that will remind many of us of the 2008 Great Financial Crisis”, if (and it is a big if) a coordinated response to the threat does not materialize. While that statement on the surface may shock some investors, we believe it’s important to understand her intent in making it.
Lagarde, like U.S. Federal Reserve Chair Jerome Powell, Bank of England Governor Mark Carney, and other leaders of global central banks, can only do so much with monetary policy to address this crisis. She and others know that the potential key to limiting the economic fallout from the virus is likely going to come from politicians and via fiscal support measures, similar to the type the UK announced. Lagarde is simply another voice added to the chorus, telling governments to do what they need to do ensure that more permanent structural damage does not occur due to what is widely believed to be a transitory crisis.
In this case, Lagarde is calling for a response that saves the pipes and plumbing of commerce. In 2008, the need was to save the pipes and plumbing of the banking industry. This time around, the banks that are not effectively supported directly by governments are well capitalized, particularly in the U.S. So, while this crisis may present a risk similar to 2008, we do not view it as an exact replay, as bank solvency will very likely not be a problem. This should give investors some comfort, because banking crises are a whole separate, uniquely bad world of pain.
In virus news, the coronavirus continues to spread, with diagnosed cases rising across the world. (We do not claim to have any edge or unique ability to forecast the progression of this outbreak. Furthermore, leading medical experts have stated that such an exercise is effectively impossible.) Italy has topped 10,000 infections, Iran has 9,000, South Korea is reporting 7,700, Spain has approximately 2,000, France is reporting 1,700, and the U.S. has more than 1,000. In addition, the World Health Organization (WHO) has officially declared the outbreak a pandemic. While this is troubling, it is not unexpected. In our view, the news that matters most to the market right now is in the hands of governments around the world. We’re eagerly waiting their responses.