Flight ban drives flight to safety

A series of events on the global stage caused the pound to fall to its lowest level in five months yesterday.

As President Trump announced his travel ban, markets were spooked by its effect on global growth, creating a flight to safety. This was exacerbated by the ECB action which also led to demand for the greenback.

The volatility that has driven markets as the Coronavirus outbreak has been characterized as a pandemic looks unlikely to abate, unlikely even by the end of H1.

In a press conference attended by his senior scientific advisors, Boris Johnson said that the UK has moved from containment to delay, basically confirming that any effort at stopping people being affected has come to an end and concentration will now be on slowing its spread and protecting those most at risk.

The FTSE fell to its lowest level in thirty years as it lost over 10% of its value in a single day.

Johnson was questioned by his audience about the reasons why the UK appears to be reacting differently to the rest of mainland Europe, particularly Italy which is full lockdown and Germany where Angela Merkel said it was likely that 80% of the population would be affected. The scientists gave credible reasons for the UK policy, but the public is concerned that several measures have not been introduced.

While the global economy is clearly going to be seriously affected, the measures announced in the budget designed to provide relief to those who are self-isolating were reinforced by the Prime Minister who confirmed that more assistance would be made available as and when it becomes necessary.

The pressure on the entire financial system due to the isolation measures and their effect on economic captivity is beginning to look worse every day.

It remains impossible to say with any certainty that the UK will see a recession but with every new measure that is announced, or demanded, the likelihood grows.

As the FTSE 100 fell to a low of 5201.50, the pound reached a low of 1.2491 before recovering to close at 1.2577.

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Global markets in a tailspin

The completely unexpected nature of Donald Trump’s press conference at which he announced the travel ban on anyone flying to the U.S. from Europe led to a case of delayed reaction as traders and analysts tried to decide their view on its effect on markets.

In the end, it was the obvious answer that prevailed as so often happens in these cases. Global markets tanked as the effect of the ban on activity was fully priced in. Trading on the major New York equity exchanges had to be suspended for a while as fail safes were activated.

President Trump is going to great lengths to reassure the American people but there is a noticeable lack of scientific output being released, with Trump relying on his new mantra; keep calm and it will pass. It remains to be seen just how much faith there is in the President’s remarks.

The Fed said it will remain vigilant regarding banking liquidity and will continue to pump more money into the system should that become necessary. Following the Fed’s announcement, the New York Fed confirmed that it will pump $1.5 trillion into the system in a move designed to calm markets after today’s meltdown.

Risk appetite has fallen off a cliff as from an activity perspective, nothing can be done to provide stimulation, as more G7 nations move towards lockdown in one form or another.

On February 12th, the Dow Jones Index traded at an all-time high of 29,586. It closed yesterday at 20,976, having reached a low of 20,890, a fall of 29.1% in less than 30 days.

The dollar index reached a high of 98.33 but corrected to close at 97.45 as traders simply have no real fix on what will happen next.

ECB holding back in case it gets worse

The European Central Bank was the first major Central Bank to hold one of its regular Monetary Policy Meetings yesterday but was also the first not to cut interest rates.

With official rates already in negative territory as the Central Bank tries to stimulate an economy that is dying on its feet, there is an argument that says there would have been little benefit to a further rate cut.

The every man for himself attitude that has characterized Italy’s plight took another turn yesterday as Germany declined to send facemasks to Italy which forced Italy to buy them from China which has an ample supply.

Coronavirus is certain to have a devastating effect on the Eurozone economy with Italy suffering the worst. To use the analogy of the effect of the virus on humans, the most vulnerable should be protected. Unfortunately, Italy’s family are failing to come to its aid, preferring to self-isolate.

The measures announced by Christine Lagarde were designed to protect banks and their ability to lend. Given the lack of take-up before the virus struck it is unlikely that borrowers will suddenly flock to their banks for help.

Ms Lagarde missed a trick in not copying her predecessor in saying that the ECB would do whatever it takes to ensure the survival of the euro. This was Mario Draghi’s famous response when asked what measures he planned to put in place following the financial crisis.

The euro’s recent rally finally came to something of a halt yesterday. It fell to a low of 1.1055 but rallied as the dollar corrected and closed at 1.1175, down on the day from its high of 1.1333.