Government announces Coronavirus plans

Yesterday was the day when Coronavirus got serious! The public have been bombarded by a series of numbers with caveats attached but there remains no serious estimate of the questions on everybody’s lips; what is the mortality rate and what is the likely infection rate?

The Bank of England Governor was at the forefront of hedging his bets in comments to G7 Finance Ministers and Central Bankers. Comments like we hope that the damage caused by Coronavirus can be limited and the economic shock could be large (?) but will ultimately be temporary, illustrate the concerns that the Government and Central Bank have over the immediate future.

The Government produced its battle plan which showed that there will be a graduated response as conditions worsen. The Chief Medical Officer described an 80% infection of the British Population as the worst case. A 1% mortality rate is the current estimate which is well below some other pandemics.

Carney who stands down on March 15th answered questions about the MPC’s response to both the Coronavirus outbreak and the Fed’s actions by preferring to wait and see. This could be a dangerous response, but as long as the Bank keeps ahead of the curve and prepared to act, the pound shouldn’t suffer too much more.

Yesterday the pound had a mixed day. It rose against a weakening dollar but continued to lose ground versus the euro.

It rose to a high of 1.2844, closing at 1.2811. Against the euro, it fell to a low of 1.1435, closing at 1.1458.

All bets are off now as data is disregarded in favour of monetary policy and spread of Coronavirus.

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Fed cuts by 50bp to confirm the seriousness of the outbreak

In one move, the Fed regained its position as the leader of the global financial system.

In acting decisively, outside of its monthly cycle, the FOMC showed a decisiveness that has been lacking in Central Banks since the 2008 crisis. Jerome Powell has been criticized unerringly by President Trump but his speech following the rate announcement elevated his status and showed that if Trump has only done one thing right, it is looking outside the economics elite and appointing a lawyer, however eminent, to replace Janet Yellen.

Powell’s comment that he saw a risk in the outlook for the economy and decided to act is in stark contrast to the wait and see comments that have emanated from other G10 nations.

The magnitude and persistence of the effect on the overall economy remain uncertain and the situation should be considered fluid.

The turnaround from the situation just one month ago has been incredible and although the U.S. now has joined the ranks of the ultra-low rate economies it remains, outside of Coronavirus, in a strong position.

It is likely that the Fed’s move was as much about the global economy and the effect a slowdown will have on U.S. growth as it is about the spread of the virus internally.

The Dow has fallen by close to 15% in the runup to the rate cut and the next few days will decide if this is a healthy correction or the start of the fall that will prove to be the beginning of the next global crisis.

The dollar index fell to a low of 96.94, closing at 97.14. Technical levels and economic data are tough to interpret in the current environment, but the 96.50 level is significant support. The employment report due for release on Friday may have prompted today’s Fed action, since it is entirely possible that Powell has received a sneak peak.

Italy to be the new Japan as Eurozone growth slows to crawl

Christine Lagarde is still learning the ropes of Central Bank leadership after just three months into her role as President of the European Central Bank. The decision of the U.S. Federal Reserve to slash interest rates has heaped a great deal of pressure onto her to act decisively as the economy is set to suffer from the direct effects of the Coronavirus outbreak.

Italy is the focal point to the outbreak but is the overall effect on the region’s economy and how it reacts to the situation that could determine the future of the region.

Will any escalation be treated by each nation individually? or will Brussels be able to ensure that the Eurozone deals with containment as a whole.

Ms. Lagarde already faced a major test of her abilities. The ECB meets next week, and the spotlight will be on its rate setting committee to act dispute being the Central bank with the least room to manoeuvre

The debate over negative rates (ECB rates are currently -0.5%) is raging across Europe. Where Powell said late last week that the Fed was ready to take appropriate action, the ECB comment was far blander. In its statement on the crisis, it said that it was ready to act in accord with the underlying risks. The machinery of Government moves very lowly in Europe so it would be some time before a risk assessment was completed, so any intra-meeting action would be very unlikely.

The current level of the single currency versus the dollar bears very little resemblance to reality. Post-crisis it is likely that the dollar index and its makeup will be seriously considered as it has driven the euro to its current unsustainable and unrealistic level.

Yesterday, it closed at 1.1213 and closed at 1.1180. The move has caught out several traders and stop losses on short positions have been triggered. Those same traders will be looking to renew their shorts as soon as the smoke clears