Markets continue to drop—moving officially into bear territory—and money flows into safe-haven currencies, reports Adam Button.
The UK unveiled a double-barreled fiscal and monetary policy response Wednesday but it didn't help the British pound sterling or the FTSE 100. The Japanese yen was the top performer while the pound lagged.
US indices joined the DAX in reaching the definition of a bear market by extending losses to 20% from their record highs (the Dow settled more than 20% off its high, the S&P 500 breached 20% but did not settle below it). President Trump is set to speak about Coronavirus early in Asian trade (he announced a travel ban from Europe).
The Bank of England delivered an unscheduled 50 basis point rate cut and eased the counter-cyclical buffer by one percentage point. The moves were generally expected but most expected them to wait until the scheduled March 26 meeting.
The timing makes sense in hindsight as they wanted to match the timing of the government budget and send a powerful signal. New chancellor Sunak delivered a set of measures that won near-universal praise. It included a £30 billion ($38.48) response to the virus including government paid sick leave for private businesses with less than 250 workers, government guarantees on loans to small businesses and abolishing business taxes for a year. They coupled that with a five-year plan to spending £175 billion ($224.44 billion) on infrastructure.
That's the kind of budget that pound bulls were hoping for after the election before talk of more-austere measures took over. This time, the pound fell but that was likely due to the rate cut and general flows.
The broader market went back into a deep risk-averse mode after President Trump failed to deliver his promised Coronavirus stimulus. The S&P 500 fell 4.9% after briefly falling more than 6% on the day and 20% from the high.
Trump and U.S. officials will get a second chance in the day ahead. The President will speak at 9 pm EST last night on the response to the virus and House Democrats have released a stimulus package Wednesday.
The UK package is a good blueprint for what governments need to do right now – especially measures like sick leave that can slow the spread. More importantly, the market may now respond positively to mass event shutdowns because the short-term pain is likely to outweigh the long-term risks of a severe pandemic.
All this to barely mention the ECB which will reveal its set of measures today. Look for a package of rate cuts and watch for more euro selling. There are early signs that the reverse of funding flows may be drying up or overwhelmed by safe-haven flows into the U.S. dollar (USD), Swiss franc (CHF) and Japanese yen (JPY).
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
