Closing in on the bottom
As the US reveals a $2tn fiscal stimulus to tackle the Covid-19 outbreak, are financial markets close to a rebound?
Markets Weekly
03 April 2020
4 minute read
Week ahead
As countries around the world persist with strict lockdown measures, data is starting to show the effect on economic activity of the Covid-19 pandemic. In the week ahead, the pandemic will continue to be a strong focus for investors.
Starting in the UK, the Halifax house price data for March will reveal if the post-election “Boris bounce” was short-lived, as strict containment measures worsen consumer confidence and job safety in some sectors. February output is unlikely to incorporate the effects of the pandemic on the UK economy. A flat reading for growth in the three months to January suggests the economy was already stuttering, with the worse yet to come, once the data captures the impact of the pandemic.
The US initial jobless claims data is the most leading indicator of the effect of the Covid-19 outbreak on unemployment. In the penultimate week of March, the reading surged to a record high of 3.28m. Investors are likely expecting the final week to fare little better, given that containment measures will continue to remain in place and the president no longer expects them to be removed in time for Easter.
In China, foreign direct investment has fallen by 8.5% in the first two months of the year. While March saw the country lighten its containment measures and activity in Wuhan, where the outbreak began, it is unlikely that firms have already ramped up investment measures in the region.
Chart of the week
“Whatever it takes”
The Covid-19 pandemic forced central banks globally (led by the US Federal Reserve), to throw everything they had at it. Measures included dramatic interest rate cuts, significant quantitative easing and other unconventional methods focused on keeping liquidity in the market, and providing finance to small and medium-sized enterprises, in particular, who remain viable but impeded by the outbreak.
However, as highlighted before, the hit to economic activity as a result of business closures, workers being laid off and countries being forced to lockdown, can only predominantly be alleviated by fiscal stimulus.
Some countries were quicker than others to instigate fiscal measures, such as Hong Kong, South Korea and the UK. But, support is now more global for rescue packages. Witness the €750bn commitment from Germany and the $2tn one signed by the House of Congress on 25 March.
That is not to say we are out of the woods, as it were, or that the current measures will be enough. The outbreak is unique and seems to be continuously evolving. Every country in containment is looking for the peak and subsequent fall in cases before easing containment measures.
However, there is no guarantee that this will take only a few weeks. Indeed, President Donald Trump wants to remove the lockdown in time for the Easter holidays, starting 10 April.
Should strict containment measures be required for longer, a bigger bazooka may be needed. The table shows the current size of the Covid-19 fiscal stimulus, amounting to a staggering 4.1% of global output.
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