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Magazine Issues » March 2020

Opinion: Message in a virus

Fiona_RintoulStock market tumbles. An emergency 0.5% interest rate cut from the US Federal Reserve. The coronavirus pandemic has finally taken its toll on financial markets.

It’s impossible to know how the pandemic will develop, but a rate cut feels like an ineffective tool to deal with the uncertainty around the Covid-19 virus and the panic on markets it is causing. It’s a bit like throwing a dagger at a blancmange.

Also, interest rate cuts have been such a feature of the past decade that even an emergency cut no longer seems like a strong response. This was perhaps always the danger in ultra-loose monetary policy. What do you do when things really go wrong? Many fund industry commentators were unimpressed.

“The decision to cut interest rates has done nothing to quell market worries, and the reality is that it will have little effect,” said Adrian Lowcock, head of personal investing at Willis Owen.

And indeed, how could it have much effect? Some things are bigger than markets, and a virus that can be fatal is one of them. Nonetheless, for some, the cut sent a welcome signal. “The Fed is making a statement,” said Andrew Mulliner, global bonds portfolio manager at Janus Henderson Investors. “The Fed will act to support the economy and the functioning markets in any way it can.” But it wouldn’t be enough, he noted, to prevent major disruption in a situation where a supply shock (due to disrupted supply chains with links to China) met with a demand shock (due to cancelled events, travel and consumption).

Others felt the Fed’s move was potentially counter-productive. “Cutting rates in a situation like we’re in now is a pretty blunt tool and you’d really want it to be combined with governments stepping in to act as well,” said Aberdeen Standard Investments economist James McCann. “By acting now, the Fed risks giving governments all the excuses they need to sit on their hands.”

Meanwhile, just before the Fed’s announcement, Unigestion attempted a sober evaluation of the damage wreaked on markets in the last week of February, getting poetic along the way. “A beautiful rally has finally met its beast in the form and shape of a crowned virus,” said Olivier Marciot, senior vice president in Unigestion’s cross asset solutions team.

And the damage? Well, assuming standard influenza model lock-up rates of two weeks, the impact would be -2.3% of growth. This would leave China with growth of 3%, the US creeping into negative territory and Europe in recession.

“For now, our outlook is that we are not at risk of seeing a major recession arising from the spreading of the virus, but rather a marked slowdown followed by a recovery,” said Marciot.

Perhaps the most worrying aspect of the whole scenario is what happens next in terms of policymakers’ response to crises. Calling the Fed’s move premature, Mike LaBella, head of investment strategy at Legg Mason affiliate QS Investors, noted that, while the cut’s impact on the market was uncertain, “what is certain is the Fed’s already low level of ammunition to fight the next recession just got a lot lower today.”

He also sees problems in the unilateral nature of the Fed’s response, which is perhaps a sign of the times. A coordinated global response helped deal with the 2008 crisis, but with Brexit, populism and the US-China trade war, the world is much more fragmented. Never mind rate cuts – to deal with coronavirus, we will have to put all these issues aside and work together. It’s almost as if our planet were sending us a message.

Fiona Rintoul is editor-at-large at Funds Europe

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