Coronavirus stimulus: The UK responds, while markets wait on EU and U.S.
Markets are eagerly awaiting an announcement with regard to the type of fiscal support the U.S. and other governments will come to the table with. 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 industries—which will be 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 that 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 market believes we need to avoid. While we are confident that these types of fiscal measures are coming—as they already have in other countries (see below)—the market will likely not patiently wait. At this point, along with controlling the virus, we believe this fiscal support step would have the most positive impact, from a market perspective.
Bank of England cuts rates, UK announces stimulus package
While many eyes remain on Washington, D.C., further significant policy responses from other countries have been announced in the last 24 hours. The most meaningful response came out of the United Kingdom. Earlier today, the Bank of England cut its overnight rate by 50 basis points and UK finance minister Rishi Sunak announced an additional $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 Washington, D.C. and other world capitals. The U.S. has already announced $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 clearly needed on other fronts at a large-scale level, and it's expected.
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 (welcome to the job) said that the bank is preparing a significant stimulus package. Details are still to come, and we believe they will most likely be announced tomorrow.
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 today. Lagarde is simply another voice added to the chorus, telling governments to do what they need to do to 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, as it does to me, 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 over 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 awaiting their responses.