The rally in US Treasury yields (the 10-year slid to 1.10% by the end of Friday) and the double-digit decline in the S&P 500 index (-11.5% by the end of the week) encapsulate the magnitude of fear in the market. In our interpretation, the market has been pricing in a recession, as the coronavirus spreads outside of China (where activity has already started to return to normal; details in the Asian section). One could argue that the market has run ahead of itself and has been behaving an irrational manner, but that does not change the fact that policymakers across the globe will have to send reassuring messages that they are in control and are able minimise the economic impact.
In an attempt to sooth the nerves of the market, Fed Chair Powell signalled strongly that the Fed will ‘act as appropriate to support economy.’ The million-dollar question is whether injecting further liquidity would be of any help, either in terms of economic activity or to improve investor sentiment. In our view, the Fed can potentially provide comfort in the short-term. However, looser financial conditions are unlikely to fix supply-side disruptions.DOWNLOAD THE FULL ARTICLE View All Global Market Updates
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