HIGHLIGHTS OF THE WEEK
- Wild gyrations in financial markets continued this week, with equity indexes seeing their biggest one-day drops in several decades.
- Policy announcements were the other theme of the week. In Europe, the Bank of England and European Central Bank announced new measures. Fiscal authorities also came to the table with the UK budget increasing spending dramatically, and the German state bank committing to lend whatever it takes to German businesses impacted by the virus.
- Stateside, the Fed increased liquidity to overnight repo markets. A wider economic relief plan has yet to be announced, but the President will speak on Friday afternoon and provide additional details.
Markets Plunge, Policymakers Triage
Coronavirus fears continued to lead to wild gyrations in financial markets this week. On Thursday, the Dow suffered its biggest one-day decline since 1987. This has been followed by a solid rebound as of Friday morning. Beyond market movements, the week was punctuated by announcements from policymakers attempting to stanch the economic bleeding.
Leading the charge, on Tuesday, the Bank of England and the UK Treasury announced a coordinated emergency policy intervention. The Bank of England cut the Bank Rate by 50 basis points, taking it to just 0.25%. It also cut its counter-cyclical capital buffer to 0% and announced a new Term Funding Scheme for small and medium sized businesses (SMEs). Together these measures should help ensure that credit to the real economy does not freeze up even as economic activity likely does (at least temporarily).
For their part, the UK Treasury announced emergency funding of £12 billion to support for public services, households and businesses. Measures include statutory sick pay and income credits to self-employed individuals and grants to businesses impacted by the slowdown. These emergency measures come on top of £18 billion in additional spending announced in the UK budget on the same day. Together, the spending announcements amount to over 1.5% of UK GDP and should provide a lift to economic growth as the virus subsides.
Elsewhere in Europe, the ECB’s policy announcement on Wednesday underwhelmed markets that had been expecting a cut in rates. Still, it used other tools at its disposal including lowering the rate on “targeted long-term refinancing operations” (TLTROs) effectively to 0%, and increasing its QE program by €120 billion, with purchases aimed at private-sector assets. These measures were also aimed at ensuring credit to SMEs remains available.
On the fiscal front in Europe, the German government pledged unlimited cash to businesses hit by the virus, and hinted that it would step back from its self-imposed ban on new borrowing and announce additional spending as required. The German state bank is mandated to lend up to €550 billion. In characterizing the announcement, the German finance minister said “this is the bazooka.”
Stateside, the New York Federal Reserve announced it will increase its short-term repo lending $1.5 trillion over the next few days. The action is aimed at ensuring adequate liquidity in overnight funding markets.
On the fiscal front, there is speculation of a major package, but few details just yet. Trump’s speech on Wednesday announced some small measures including providing SBA loans to businesses impacted by the virus, and deferring tax payments without interest or penalties. He has also called for a payroll tax cut, but so far has not had Congress agree. House Democrats released an economic relief plan that would pay for free testing, expand paid sick days and unemployment benefits and food security programs. It has yet to be costed, but is expected to total in the billions.
James Marple, Senior Economist | 416-982-2557
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