Coronavirus continues to have an impact on markets worldwide, but particularly in Europe. So what needs to be done to change all of this? Is it too late?
Frédérique Carrier, Head of Investment Strategy, RBC Wealth Management, says: “The stock market rout continued, and indexes in both the UK and Europe have fallen more than 15% so far this week. While no sector closed the period in positive territory, Consumer Staples and Health Care fared relatively better. Signs of tightening monetary conditions appeared, as shown by the spread of Italian bonds over German Bunds increasing sharply. Investors were given a sense of things to come for global companies by Adidas, the athleisure wear and sporting goods manufacturer, which announced profits would likely halve this year as a result of the coronavirus epidemic. The company derives half of its profits from Asia, and a quarter from Europe. Its share price is down more than 40% from its January high.
“British policymakers announced powerful coordinated action in an attempt to shore up confidence and support the economy. The Bank of England (BoE) cut its bank rate by 50 basis points (bps) to 0.25% and reintroduced a scheme enabling banks to borrow from it at a preferential rate for a period of four years. The BoE’s next scheduled meeting on March 26 will be the first under new BoE Governor Andrew Bailey. A new round of asset purchases should not be ruled out. Meanwhile, the chancellor of the exchequer announced a significant loosening of fiscal policies, including a £12bn ($15bn) package of near-term measures to soften the impact of the outbreak. This is in addition to already planned stimulus of some £18bn. Combined, these two measures amount to just under 1.5% of the UK’s 2020 GDP. RBC Capital Markets expects that newsflow related to the coronavirus is likely to remain the main driver of the UK Gilt market going forward. Sterling reached a 5-month low against the dollar at 1.26.
“The European Central Bank (ECB) disappointed markets by maintaining its main deposit rate at -0.5%, but it announced a €120bn ($134bn) bond purchase programme and more attractive terms on targeted longer-term refinancing operations (TLTROs), a tool which offers loans to banks at a preferential rate. RBC Capital Markets notes that this is in effect a targeted rate cut to support the banking system. The ECB is also giving banks some capital relief by allowing them to run lower capital ratios.
“Attention is quickly turning to the possibility of fiscal stimulus. The EU Commission announced a €25 billion package. Italy announced a €12bn initiative with more likely to come. Others may follow suit.”