Risk assets were in all kinds of trouble on Monday as markets seem to be both underwhelmed and overwhelmed by central bank actions aimed at shoring up confidence and cushioning the blow to the global economy from COVID-19 containment efforts.
Underwhelmed because monetary policy is inherently inept in the face of biology and mandatory shut-ins across major economies. And overwhelmed because the scope of the policy reaction and the hasty character of the Fed’s “all in” push on Sunday evening seems to convey a sense of panic.
The BoJ doubled the target for ETF purchases Monday to 12 trillion yen, upped its JREIT target to 180 billion yen, rolled out a new lending program aimed at businesses stricken by the virus, and lifted buying of CP and corporate bonds. Meanwhile the Bank of Korea caught up, slashing rates 50bp to a record low in the first emergency meeting since the GFC.
All of that on top of the Fed’s move, RBNZ’s big cut, a $14.3 billion liquidity injection from the PBoC (albeit with the MLF rate unchanged) and dovish news out of the RBA.
Later, Haruhiko Kuroda said deeper negative rates in Japan are possible and that increased ETF buying will lower risk premiums.
But it didn’t matter. None of it mattered. Or at least not for equities, which plunged globally.
“In normal circumstances, a large policy response like this would put a floor under risk assets and support a recovery”, SocGen’s Jason Daw wrote Monday, on the way to underscoring the extent to which policymakers are helpless in the face of the current predicament: “However, the size of the growth shock is becoming exponential and markets are rightfully questioning what else monetary policy can do and discounting its effectiveness in mitigating coronavirus-induced downside risks”.
The Nikkei fell more than 2%, Australian equities plunged nearly 10% coming off the wildest session on record Friday and the Kospi is in deep (deep) trouble.
News out late Sunday in the US that New York City and Los Angeles are set to close nightclubs, shutter entertainment venues and curb restaurants to takeout and delivery only, seems to have rubbed salt in the proverbial wound by underscoring a bleak picture for the US economy in the coming quarters. Goldman sees the US economy flatlining in Q1 and contracting 5% in Q2.
China’s horrendous activity data for January-February was far worse than even the most pessimistic estimates, pointing to a deep contraction in the world’s second-largest economy.
European shares fell 8% at one juncture Monday. The Euro Stoxx 50 is down nearly 40% in less than three weeks.
Treasurys surged, with 10-year yields diving more than 33 basis points.
US equity futures remained limit-down. This is the third time in the past week that US stocks have faced a halt at the open.
“In response to this latest ‘bazooka’, S&P 500 futures opened limit down (note to self: Bazooka=Sell)”, JonesTrading’s Mike O’Rourke quipped.
“In the past, we have described the ‘Bearmageddon’ scenario as one in which the economy rolls over at a time of maximum level of easy monetary policy while asset values are expensive”, he went on to say, in a late Sunday evening note, adding that “this combination of events becomes toxic because investors begin to express concern that the central bank’s monetary policy has become impotent”.
“Markets are risk averse and unpredictable”, SocGen’s Kit Juckes said. “The coronavirus pandemic gets more serious and more global by the day”.
O’Rourke summed up the mood: “It appears ‘Bearmageddon’ is upon us”.
