As the coronavirus pandemic continues, speculation on it causing a global recession increases.
Mihir Kapadia, CEO of Sun Global Investments, said: “European equities are off to another brutal start on Monday, with major markets nosediving at the open. The German DAX is down by more than 6%, the French CAC 40 down by more than 7%, pan European Stoxx 600 down by more than 6% and the UK’s FTSE 100 down more than 7.3%. Travel, retail and leisure sectors are dragging the markets down as business brace for severe impact due to the recent nationwide cancellations and lock-downs.
“The first real data on the economic impact of the coronavirus has emerged from China, showing retail sales have plunged by – 20% year on year between January and February 2020, while industrial output fell by -13.5% in the same period. Reversing this to a positive will take a lot of time and efforts, and we may expect China’s economy to contract this quarter. The Chinese central bank and the government will need to take unprecedented actions to mitigate an otherwise sure recession. While China has fought off the Covid-19 virus, the fact that Europe has now become the new epicentre, indicates the fight is far from over.
“The Federal Reserve’s unprecedented Sunday intervention to cut its benchmark rate by a full percentage point (100 bps) to zero to 0.25% range has had little effect on European equities. The central bank also announced several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero percent.
“The Fed, along with other major central banks, also lowered the rate on standing U.S. dollar liquidity swap arrangements by 25 basis points. This is presented as joint move with the other Central Banks but they are just facilitators and it is really the Fed that is behind this.
“Markets were nervous about what the Fed was seeing down the track that would justify such a big move. The Dow Futures responded to the Fed move with a drop of 850 points and is currently trading 5% lower.”