Global Central Banks Step in with Stimulus and Liquidity as Virus Fuels Recession Fears
Weekly Update – March 20, 2020
Despite massive central bank interventions, global stock markets generally fell for the week; the major U.S. indexes sustained losses approaching 14%. Investor sentiment further deteriorated as coronavirus cases increased and new containment measures ratcheted up fears of economic recession. Worries about earnings headwinds continued to turn into solvency concerns. In the rearview mirror, however, 4Q19 S&P 500 index earnings posted a 3.1% growth rate compared to one year ago.
On Monday morning, the Federal Reserve announced a package of liquidity measures that positively surprised markets and turned futures up. It was a big program, including virtually unlimited purchases of U.S. Treasurys and mortgagebacked securities, the establishment of facilities to buy corporate bonds and municipal bonds and more. The upturn was short-lived, however: stocks fell back due to the continuing Senate stalemate that was slowing a fiscal stimulus plan for the U.S. economy. Discussion continues on measures such as loans to small businesses, including restaurants, to keep them solvent with “forgivable loans.” It is critical to the financial markets that some form of this fiscal stimulus pass soon.
Liquidity concerns flared as investors around the world sought cash, and a shortage of U.S. dollars became a global issue. On Thursday, the Federal Reserve announced it would lend billions of dollars virtually interest-free to seven central banks including South Korea and Australia; on top of setting up “swap” lines of credit with the European Central Bank and Bank of Japan.
The Fed also intervened to shore up money market funds, cut the fed funds rate to near zero and announced it will establish a Commercial Paper Funding Facility (CPFF) to facilitate the flow of credit to households and businesses. Together, those measures helped to calm the short-term credit markets.
The run on U.S. dollars exacerbated a backup in sovereign bond yields, which confounded expectations that bonds would function as a “safe-haven” asset class. Yields rose in choppy fashion throughout the week but declined across the curve on Friday in response to the Fed moves. The ten-year U.S. Treasury yield started the week at 0.95%, climbed to 1.29% but subsided to 0.94% by the close.
The U.S. dollar gained against most currencies. Oil prices ended the week below $23 per barrel, falling in reaction to recession fears and the ongoing supply feud between Russia and Saudi Arabia. Gold fell from $1,517 per ounce to about $1,485.