Global equity markets tumble, as COVID-19 spreads further afield
The spread of COVID-19 to Italy (Iran, S. Korea) generated multi-sigma losses for equity indices and speculative grade corporate bonds on both sides of the Atlantic, while US Treasuries and Gold prices rallied. The S&P500 declined by 3.3% and euro area equities tumbled by -4% (FTSE/MIB:-6%), with US 10-Year yields declining by 10 bps to an all-time low of 1.30%. Market reaction prices in significant uncertainty about the further evolution of COVID-19 and its negative impact on global trade, consumer spending and economic activity in general.
The Federal Open Market Committee (FOMC) minutes from the January 28-29 meeting confirmed the Fed’s intention to maintain monetary policy steady, at least in the short-term, with the federal funds rate in the range of 1.5% - 1.75%. Indeed, the current policy stance was deemed “likely to remain appropriate for a time”, barring a material reassessment of its economic outlook (e.g. if the disruptions stemming from the COVID-19 hit the US economy hard).
FOMC members believe that downside risks for economic activity have recently decreased, highlighting the easing of trade tensions following the US-China “Phase 1” agreement and the ratification of the US-Mexico-Canada trade agreement. However, they noted that the consequences of COVID-19 on the global economy will be closely monitored. Note that the latest FOMC projections (December) point to GDP growth of 2.0% yoy in Q4:20 (consensus: 1.8% yoy).
FOMC members expect inflation to move closer to the target of 2% in coming months. Indeed, the annual pace of growth for the Personal Consumption Expenditure (PCE) index (the Fed’s preferred measure for gauging inflation) was 1.6% yoy in December. According to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model, it is expected at 1.8% yoy in both January and February.
The FOMC minutes suggest that the reserve maintenance purchases of US Treasury Bills will likely start to be tapered after the April tax season. Recall that these purchases, since their adoption in mid-October to ensure ample reserve balances and alleviate repo-market funding pressures, have proceeded with a monthly pace of c. $60 bn (cumulative net purchases of $260 bn as of February 19th). Markets hold a significantly more benign stance regarding the prospects for monetary policy, fully pricing-in one cut of 25 bps in H1:20 and one more by end-2020.
On the other side of the Atlantic, the minutes of the ECB meeting of January 23rd supported the view that the ECB will remain on hold in the foreseeable future (Deposit Facility Rate at -0.5% and net asset purchases at a monthly pace of €20 bn). Furthermore, the minutes did not contain any details regarding the issues that the strategy review (set to conclude by year-end) will cover.
On the economic outlook, ECB officials highlighted the partial reduction of international trade-related uncertainty and survey-based signs of stabilization for growth dynamics. Nevertheless, it should be noted that the meeting preceded the developments in recent days regarding the spread of COVID-19 (in fact, this issued was not referred to in the minutes). Recall that the latest business surveys (PMI) are consistent with the view for a modest improvement in the momentum for economic activity, albeit with signs of supply chain disruptions related to COVID-19 starting to appear (see Economics).