Global Central Banks Take Action as Virus Impacts Markets
Weekly Update – March 13, 2020
Stocks declined for the week. On Thursday, markets plummeted to their worst daily loss since “Black Monday” in 1987, after the WHO declared the Coronavirus outbreak a pandemic. On Friday, President Trump declared a national emergency; markets recovered most of their Thursday losses as a result, turning a rout into a decline. The Dow Jones Industrial Average finished about 2,700 points down on the week, other major U.S. indexes fared similarly; international markets suffered steeper declines.
The bond markets did not consistently benefit from the risk-off sentiment in the stock markets. U.S. Treasury yields began to climb on Tuesday, pointing to a disconnect in the traditional bond stock relationship; some analysts hypothesized that due to fears of a global slowdown, major market participants were experiencing a liquidity crunch and were trying to sell whatever they could to raise cash.
The Federal Reserve stepped up to ease the strain, announcing it would inject as much as $1.5 trillion into the financial system and widen the maturity range of the Treasury securities it was buying. Other central banks also announced policy supports. The Peoples Bank of China targeted required reserve ratio cuts that it said will release 550 billion yuan ($79 billion) of liquidity. The Bank of Japan said it would buy ¥200 billion ($1.9 billion) of Japanese government bonds with maturities of five to 10 years and would inject an additional ¥1.5 trillion in two-week lending.
The 10-year U.S. Treasury yield ended at 1.00%, up from 0.71% last week. The U.S. dollar gained against a basket of major currencies. Oil prices fell on economic concerns and on the feud between Russia and Saudi Arabia over production cuts. Gold prices also fell significantly, perhaps for the same reasons as bonds.
The preliminary March reading of the University of Michigan Consumer Sentiment index printed 95.9, down 5.1 points from February. The current conditions index at 112.5 was 2.3 points lower; the expectations index fell 6.8 points to 85.3. One-year inflation expectations were down a tenth to 2.3% and five- to 10-year expectations were unchanged at a low of 2.3%. The sentiment drop was attributed to the spreading Coronavirus and the stock market decline.