Few See End of Rout as Central Bank Effectiveness Doubted

With financial markets bracing for another brutal week as coronavirus cases continue to multiply around the world, there are few investors willing to call the end of the risk-asset rout.

And as traders rush to price in a fresh round of global monetary stimulus, questions are emerging about whether interest-rate cuts will be enough to support markets this time around. Fiscal policy is seen as more effective, with coordinated monetary policy more important from a signaling perspective.

Here are the views of a selection of economists and strategists:

Disruption Into 2Q

Chetan Ahya, chief economist at Morgan Stanley:

Morgan Stanley sees two possible scenarios. Under the first, the virus outbreak will be contained by the end of March and the production disruption limited to the first quarter. Policy-makers in China and Asia will provide meaningful support. Under the second scenario, the virus escalates in new parts of the world before peaking by the end of May. The disruption extends into the second quarter, affecting corporate profitability in select sectors and risking the emergence of corporate credit risks.

“We believe that we are heading toward scenario 2. Our strategists believe that more liquid markets, such as equities and Treasury yields, may well see a bounce from oversold levels soon, but credit has not cheapened enough given the greater return asymmetry.”

V-Shape No More

Paul O’Connor, head of the U.K.-based multi-asset team at Janus Henderson Investors:

“The unusual lack of visibility on the economic outlook complicates efforts to work out what is now priced in to financial markets. What’s clear is that market purge of the past week has priced out all hopes of a V-shaped recovery in global growth.”

“Central banks are undoubtedly going to start cutting rates very soon. Still, they do not have much ammunition at their disposal as the virus is a real economy shock that will not be easily solved by monetary means. Fiscal policy has more scope here but it is far from clear that the global response on this front will be quick enough or big enough to offset the broadening adverse impact of the coronavirus on economic sentiment and activity.”

Central Bank Limits

Seema Shah, chief strategist at Principal Global Investors:

“No matter how much the Fed cuts rates and stimulates consumer demand, it cannot eradicate the reality of quarantines and travel barriers brought in to arrest the spread of infection. Factories will continue struggling to return to full capacity. Stimulating demand is almost useless when global supply chains are disrupted.”

“Once the virus has stabilized and supply chains are once again functioning, lower policy rates can help facilitate the recovery. But, until the number of new infections drops, monetary policy simply is not equipped to trigger the V-shaped recovery that markets were originally anticipating.”

“With global rates already at all-time lows, we need accommodative monetary policy but also an aggressive fiscal response by central banks. Monetary policy isn’t optimized for addressing a shock such as this.”

Insurance Cuts

Anthony Doyle, global cross-asset specialist at Fidelity International:

“Even with the correction seen so far, the uncertainty that surrounds the economic impact of COVID-19 means that equity draw-down risk will continue to remain elevated in the near term, while high-quality government bonds should continue to experience gains given investors preference for safe-haven assets.”

“It is likely that a number of central banks will ease monetary policy in coming months. The market is now pricing in 100 basis points of rate cuts by June from the U.S. Federal Reserve, which would equate to a substantial amount of monetary policy easing. Even if interest rates were reduced by half this amount, it would likely support risk assets. The market would see such a move by the Fed as ‘insurance cuts.’”

“COVID-19 will also likely see greater coordination between monetary policy and fiscal policy in coming months. I expect governments will seek to deploy highly targeted fiscal measures like aid payments and temporary tax breaks as they seek to support the sectors most affected by COVID-19. Indeed, fiscal policy is likely to be more effective than monetary in supporting the real economy through coming months.”

Effectiveness Unclear

Eugenia Fabon Victorino, head of Asia strategy at Skandinaviska Enskilda Banken in Singapore:

“We need a real improvement in global infections to call for a bottom. No matter how much the global central banks cut, it would just provide temporary support to assets. At the end of the day, earnings warnings would continue even though markets can become so cheap.”

“The effectiveness of monetary policy is not that clear considering this is a supply shock. What we’re having now is supply-driven volatility, not weak demand. We have shutdowns in production. What we really need is for fiscal policy to step up to the plate.

“The greatest uncertainty is when will China be back in full production. Even though they’re back at work it’s not in full production.”

Close to Bottom

Amir Anvarzadeh, market strategist, Asymmetric Advisors:

“If we are not at the bottom of the market, we suspect we are very close to it and we feel that much of the fear regarding a pandemic has already been discounted in one of the fastest corrections that we have ever encountered. After weeks of trying to identify shorting opportunities in stocks directly exposed to the Covid-19 contagion, we have turned our attention back to recommending aggressively buying secular growth stocks, particularly in technology segments at these much lower levels.”

“We think there are already strong signs emerging that the market is bottoming led by key tech stocks in the US which rebounded nicely during last Friday’s sell-off.”

Signaling Important

Charlie Jamieson, chief investment officer at Jamieson Coote Bonds:

“It’s very important that the central banks signal good intentions to support markets and they are almost certain to cut interest rates and likely in a fairly coordinated manner. The signaling is very important. We don’t think the rate cuts in and of themselves will make a huge difference, but the support of the additional liquidity provision, which is almost certainly likely to accompany that, can soothe markets to some degree.”

“The problem we have at the moment is extreme volatility in particular segments and the credit market is essentially closed. Credit is not trading and primary credit markets haven’t been issuing bonds. We do expect that this is going to continue for some time. Coronavirus will likely be with us for a lot longer than people estimate.”

Bounce Strength Key

Matt Maley, chief market strategist at Miller Tabak + Co.:

“We would expect a bounce early next week. That initial bounce should be a strong and sharp one, and it should last a couple of weeks. After that, the next decline will be vitally important. If it creates a higher-low that is followed by a higher-high, it’s going to be very bullish. If, however, it breaks below whatever near-term low we make, it’s going to indicate that a bear market is not only possible…but quite probable.”

Government Rhetoric

Damien Loh, chief investment officer at Ensemble Capital Pte in Singapore:

“We might see one leg of risk off but it feels to me most of the bad news has been priced in. We’ll start to see more rhetoric from governments to address the situation both from a fiscal and central bank easing standpoint.

“Also to note the source of the virus i.e. China is starting to see the situation getting better; no deaths outside of Hubei and most new cases are in Hubei so it looks to be contained for now, which will give the government more impetus to restart economic activity.”

— With assistance by Joanna Ossinger, Chris Anstey, and Lilian Karunungan

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