Coronavirus (COVID-19) fears overwhelmed global financial markets in late February, sending equity indices sharply lower and the 10-year Treasury yield to record lows. Initial concerns were more focused on supply chain disruptions in China, but as reports surfaced of new cases being reported in Europe, Brazil, and other Asian countries, the tone in equity markets shifted more bearish and more in line with what was already present in fixed-income markets for much of 2020. As discussed in last month’s commentary, financial markets have been speculating on the ultimate impact on the global economy from the viral outbreak, and the more recent panic is based on worries that a global pandemic is emerging that will have a greater and more prolonged impact on global growth than initially anticipated. To this point, World Health Organization (WHO) officials have not labeled this as a pandemic. At the end of the day, it’s difficult to forecast something so fluid as this, and in the meantime, uncertainty fuels volatility and risk-off sentiment.
- Coronavirus fears paralyzed risk markets in the final week of February.
- Markets are now pricing for Fed rate cuts in March and April and an emergency rate cut of 50 bps was announced on March 3.
- Fed Chair Powell issued a short statement on February 28 saying that the Fed will act as appropriate to support the economy.
- February PMI data was much weaker than expected, and the combination of tighter financial conditions and a tepid January PCE inflation report may give the Fed the cover it needs to ease policy.
Prior to the late February risk-off trade, the general expectation has been that there would be a V-shaped recovery in the global economy, with the greatest economic whipsaw experienced in China. In other words, a contraction in economic output would only be limited to one quarter before rebounding sharply in the following quarters, which was essentially what was experienced during the 2002-2003 SARS outbreak. This expectation had been voiced by Fed and ECB leaders as well, but markets have obviously become less confident in that assessment.
At the end of 2019, a full 25 bps rate cut was not priced for all of 2020. By the middle of February, the market was pricing a full cut at the September meeting and effectively 1.5 rate cuts for the entire year. However, with last week’s turmoil, market pricing now implies a rate cut at the March FOMC meeting and nearly 100 bps of rate cuts by the end of the year. Additionally, 3-month LIBOR declined by 12 bps on February 28, the largest daily decline since December 2008. On March 3, the Fed initiated an emergency rate cut, which hadn’t happened since the financial crisis.
This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.