Covid-19: Fiscal and monetary policy implications II

Since our last post, a lot has happened in markets. The scheduled FOMC-meeting due to take place on the 18th of March, were markets expected a rate cut was replaced by an emergency rate cut on Sunday the 15th of March.

The Federal Reserve slashed interest rates to a range of 0-0.25% in light of the Coronavirus, as this was the second emergency rate cut during a period of 2 weeks.

Intermeeting-actions by the Federal Reserve, comprised of emergency rate cuts have not been witnessed since the mortgage subprime crisis of 2008.


Furthermore, the Federal Reserve launched a massive $700 billion quantitative easing program in order to quell the harmful effects of the Coronavirus on the U.S. economy. 

A relief package of 1 trillion $ was proposed on Thursday by U.S. Senate Majority Leader Mitch McConnell, and is seeking bipartisan support and is scheduled to be voted on next week in the U.S.

Proposals of controversial, "helicopter money" consisting of a cheque of 1000$ for every american have also been proposed in order to stave of the rapidly deteriorating U.S. economy.

Interestingly, due to the sheer-size of the relief package, bond yields temporarily  rose despite the rate cuts, as markets are expecting the funding of the relief package being carried out via treasury bonds, putting a downward pressure on yields as the U.S. Treasury is set to massively sell new bonds.

Currently market participants are speculating of the Federal Reserve adopting of yield-curve control, a tool that is used by the central bank in order to put downward pressure on longer-dated maturities in order to lower the yield.  The tool has not been in use for almost 70 years. 

The Coronavirus has lead to extensive sell-offs in FX-markets, leading to a surge for safe haven currencies such as the Swiss Franc and the Greenback.  Top oil-producing nations' currencies have taken the majority of the drop as crude-oil prices have collapsed in the wake of a price-war between Saudi Arabia and Russia as well as a worldwide demand-side drop in the wake of the Coronavirus-crisis.

In order to mitigate and alleviate the downward pressure on dollar-related pairs, the Federal Reserve has entered into several new FX-swap lines, lasting at least six months, with central banks of following countries; Australia, Brazil, South Korea, Mexico, Singapore and Sweden ($60bn), and $30bn each for the central banks of Denmark, Norway and New Zealand.

The FX-debacle has lead to some central banks threatening currency-interventions in order to shield their national currencies from the appreciation of the U.S. dollar, among these is the Norwegian Central Bank, who has not intervened for the last 20 years. 

Rumours of the G7, in concerted action intervening have surfaced, as individual economies and centralbanks lack the amount of liquidity necessary in order to influence exchange rates. It is thought that these measures will alleviate the strain seen in the equities and credit markets across the globe.

Meanwhile other countries have followed suit, with aggressive fiscal and monetary stimulus. Currently the U.K. is a proposing a whooping 440$ billion dollar package in order to stave of the harmful effects of the Coronavirus on their economy.

China is expected to unleash trillions of yuan of fiscal stimulus, backed by as much as 2.8 trillion yuan ($395 billion)in local government bonds, to revive its economy.

Increasing national lockdowns, constricting movement of citizens to bars, cafes, restaurants, cinemas and other public venues in order slow the spread of the Coronavirus have garnered pace across the globe.

The E.U. has imposed a 30-day travel ban for non- E.U. citizens visiting the E.U. and individual countries such as Poland and Ukraine have completely stopped inbound and outbound flight-traffic for several weeks in order to assess the developments of the Coronavirus.

Contrary to current sentiment, the airline industry hasn't completely evaporated due to the Coronavirus, whilst substantial demand has been reduced, this graphic clearly illustrates that global aviation has not been completely knee-bent.

It poises questions as to wether it is possible to completely contain the virus-spread due to the large migration of people between countries and continents.


Existing Coronavirus-cases have peaked and plateaued in China and the rest of Asia, as stringent and swift quarantine measures shielded the infection from multiplying. 

Currently the E.U. and U.S. are at the epicentre of rising infections and deaths, with a notable case being Italy due to its old-age demographic - an estimated 22% of Italy's population is over 65 years old, with the Coronavirus bearing increasing risk of detrimental health-effects on the elderly.

All is not gloom-and-doom, as early signs are suggesting that the Chinese workforce is slowly returning to ordinary life as the strictest of quarantine measures are being gradually lifted due to the number of infections plateauing according to a fresh IMF-blog post.

Whilst, there is an ongoing concern that the Coronavirus will lead to new-waves of infections as people return to work, there is the argument that the world is better equipped and prepared for new waves due to the recent adaptions implemented.

We at East Invest believe that the infections are set to plateau over the coming 6 months as increasing travel-restrictions across the globe will hinder the spread of the virus, coupled with the fact that recovered cases will be increasing and leading to increased populations of immunity. 

Moving forward we expect high levels of volatility, which would only be alleviated by increased monetary and fiscal stimulus. It is thus important for investors to keep an eye on the actions of governments and centralbanks.

We also believe that is very important to keep an eye on the rate of new infections, as a slowdown in infection-rates will lead to reduced levels of volatility and higher equity prices.