The WHO yesterday declared Covid-19 a pandemic and the global risk-off theme has continued this morning. Despite China claiming it is through the peak, with fewer new cases being reported, the west is seeing cases increase rapidly. Italy, for example, has shut all shops except the essentials (supermarkets and pharmacies) as fatalities spiked by 31%. With the Chinese getting back to work, supply shock should fade, however, demand shock may arise as Europe continues to shift from containment to lockdown mode. Reports suggest UK PM Johnson is to chair an emergency COBRA meeting today, where expectations are that the UK will move from containment to delay, i.e. “social distancing” where cancellation of large-scale gatherings and school closures may be announced.
Following the BoE’s emergency 50bps cut to 0.25%, the chancellor of the exchequer yesterday took hold of the reins of the government's “coordinated” and “comprehensive” response which saw the kitchen sink being thrown at cushioning the economic impact from coronavirus. Rishi Sunak announced a £30bn package promising “to support British people, British jobs and British businesses through the moment.” Others, especially outside London and the South, appeared pretty disappointed, having voted for Boris Johnson following promises to revive regions with the UK that have been “left behind”. Unfortunately, it appears as if these plans have been put on the back-burner in preference for dealing with coronavirus, now a global issue which some experts suggest could see one in five workers sick and out of work, taking priority. Also announced was the UK’s growth expectations at 1.1%, the lowest growth rate since 2009, and doesn’t take into account the economic effect of coronavirus. A rebound is expected for 2021-2022 at 1.8% and 1.2% for 2022-23; expect revisions to all the above. The generous offer of statutory sick-pay, even if one doesn’t display symptoms, at £94.25 a week has raised some eyebrows, however. We look to further measures to be outlined following the COBRA meeting today.
With both the Fed and BoE having cut rates by 50bps, markets are looking at the ECB, who meet today and are due to announce at 12:45 (GMT). ECB Chief Lagarde, the self-proclaimed “wise owl” of monetary policy, is expected to announce new stimulus measures including ultra-cheap loans to banks which will be passed onto small and medium-sized companies. The market is also currently pricing in a 10bps cut, but as rates are already at record lows of -0.5% a further cut may do little to stimulate the economy and may in effect hinder lending by further reducing bank margins. On the flip-side, we have seen how markets have reacted to recent central bank moves, which have not necessarily been in-line with expectations, so the ECB will need to deliver appropriately. Importantly, any and all central bank measures will not stop Covid-19 but can help calm markets and sooth potential economic shocks.
We continue to monitor markets and remain comfortable with our current positioning.