(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)
By Mike Dolan
LONDON, March 3 (Reuters) - The first 10% weekly stock market drop since 2008 shows investors fear the coronavirus epidemic could be as damaging to the economy as the global banking crash. The economic policy response so far is nowhere near.
Investors must now decide whether last week’s market plunge was exaggerated and whether central banks and finance ministries now talking to each other are being reasonable in hesitating - or whether governments have underestimated this and coordinated policy measures are needed to stop the rot.
While vastly different on obvious levels, the COVID-19 pandemic is similar to the financial crisis of 2007-2008 in that they both involve cross-border contagion that could trigger a downturn and can’t be snuffed out by just one country’s actions.
JPMorgan, for example, says its markets models now indicate an almost 90% chance of U.S. recession ahead, and no year-on-year growth in global real GDP this year for the first time in more than decade.
Markets are fearful that second- and third-round impacts of prolonged supply chain and workplace disruptions could lead to layoffs, bankruptcies and banking stress.
That’s largely why futures markets moved so quickly to price two whopping half point Federal Reserve interest rate cuts by July as well a series of extraordinary rate cuts from other major central banks to boot. The Fed obliged by delivering one of those cuts in an emergency move on Tuesday.
But pronouncements over the past week by other central bankers, including the European Central Bank, Bank of Japan and Bank of England, on any similar moves to Tuesday’s Fed decision have continuously been qualified by “if needed” or “as necessary” and stop short of pledging immediate coordinated support. Fiscal policy measures are still a relatively loose collection of local efforts.
Even though markets had rallied on Monday and early Tuesday in anticipation of an extraordinary statement from the Group of Seven economic powers, the statement itself contained no direct calls for concerted new government spending or coordinated central bank action. The G7 instead preferred a more vague commitment to ‘appropriate’ policies’ while they “stand ready to cooperate further on timely and effective measures.” And despite an instant spike higher on the subsequent Fed decision, stocks are already paring back gains of the prior 24 hours.
There’s a legitimate feeling among many governments the shock from virus spread is still largely a temporary supply-side hiatus that a demand stimulus would do little to resolve. One senior G7 source told Reuters on Tuesday: “It is not yet possible to predict how the epidemic will develop. So the impression is that it’s still too early for such a step.”
One nagging concern for investors is that global policymakers’ muted response so far is symptomatic of a revival of economic nationalism in recent years, which has led to a series of protectionist trade wars, many damaged alliances and neutralised international institutions.
The G20 was set up to deal with the Asia financial collapse of the late 1990s. It was largely sidestepped during the trade war between Washington and Beijing last year. When the finance chiefs from the group met about a week ago in Riyadh, their statement contained only passing reference to the coronavirus, underwhelming markets.
In contrast, the concerted ‘shock and awe’ response after the crash in 2008 culminated in unprecedented monetary easing among the world’s central banks and, by 2009, commitments from Group of 20 economic powers to a $1.1 trillion fiscal stimulus and a promise to prevent systemically important banks failing.
Portfolio managers at Barings said on Monday they were “somewhat skeptical” of both the appetite and ability of powers to coordinate monetary and fiscal policies akin to 2008. “Confrontational rhetoric between world powers and sanctions issued by the U.S. as recently as last week make U.S. leadership in this crisis appear unlikely,” said sovereign debt heads Ricardo Adrogue and Cem Karacadag.
One official at a major central bank told Reuters on Monday that he felt the spirit of cooperation between monetary authorities was still good, but much less so among political institutions. “Faced with this kind of a global stress to humanity, it’s my wish that nationalism would be sidelined at least temporarily.”
The pandemic provides a test of whether economic nationalism has irreversibly undermined such collaborative institutions. If that fails, investors should worry that there may be no cavalry to ride to the rescue this time around.
Twitter: @reutersMikeD Editing by Paritosh Bansal and Edward Tobin