Stockmarkets are falling again despite world central banks –led by the US Federal Reserve – moving quickly to try to pump money into the system and the Fed cutting interest rates to almost zero.
Investors are responding to an unprecedented shutdown in large areas of the economy and , crucially, to the uncertainty about how long this will last and what a recovery might look like. This means that despite the extraordinary firepower which central banks are starting to unleash, markets just keep lurching lower.
Events have moved on over the weekend, with countries increasing sweeping restrictions on the public and on travel. This is a warp-speed downturn. As economic activity in large parts of the private sector grinds to a halt, we are starting to see companies act.
On Monday morning we heard that Ryanair is to ground much of its fleet and cut jobs and pay, IAG – which owns Aer Lingus – is also slashing capacity; Primark is closing shops; Paddy Power has warned on a big impact from sports cancellations and so on. Meanwhile thousands in the pub and tourism sectors are facing lay-offs, both here and across Europe.
Pace
The dramatic pace of events means investors remain terrified, despite the Fed's actions. Economic data from China on Monday morning did not help.
"The move merely seems to have underlined the potential hit to economic activity from coronavirus as investors grapple with data showing the extent of impact on China's economy; retail sales down 20 per cent and industrial production down by 13.5 per cent in early 2020," Conall Mac Coille of Davy Stockbrokers said in a morning note to clients.
There is much more to come and a massive wave of lay-offs and redundancies. Profits will be decimated pretty much across the board. And markets are also worrying about the impact on banks and the risks of a spike in bad debts and a collapse in new business.
The Fed action was prompted in part by a desire to keep credit markets operating as normally as possible and avoiding the kind of breakdowns seen during the 2008 financial crisis.
A key challenge for policy makers is “ to prevent a negative credit doom-loop of insolvencies in the banking system,” said Dermot O’Leary, economist at Goodbody Stockbrokers. Irish banks have been amongst those hit in the latest wave of share sell-offs.
As well as the central bank actions,financial markets will look to governments to increase spending significantly to compensate to some extent for lower activity in the private sector.
Fall
Meanwhile governments across Europe are trying to act to protect employees being laid off and try to ensure their employers can remain in business until the crisis passes. As well as higher healthcare costs , this will require significant increases in spending on income and business supports on a potentially enormous scale.
The massive fall in demand is happening much faster than during the financial crisis which hit in 2008 and the global economy is almost certainly in recession. Investors worry whether governments have the firepower and willingness to react quickly enough and in a coordinated way.
The key economic policy goal is to try to limit the damage so that recovery can take hold when the worst of the pubic health crisis passes. But the most important job is the public health response – economic confidence will not return until this is under control and for the moment there is no clarity on when this might happen.
