Talk about doped to the gills. This week rattled and liquidity-addicted equity markets received the biggest monetary and fiscal stimulus on record. So it’s no wonder they went nuts – at first. Tuesday saw the S&P 500 gain 9.4%, the biggest daily jump since 2008. The FTSE 100’s 9.1% rise was its second-best daily showing on record.
Congress delivered a $2trn stimulus on Tuesday, while the “Federal Reserve has gone nuclear”, as Robert Guy puts it in the Australian Financial Review. The world’s most powerful central bank’s embrace of unlimited quantitative easing, or money printing – dubbed “QE Infinity” – will be remembered as a “defining moment” not only in this crisis, but in “the history of central banking”.
Fixing the world’s financial plumbing
The Federal Reserve had already slashed interest rates to near-zero and announced a $700bn quantitative easing package but even that did not calm gyrations in markets. Panicking global investors continued to dump assets of all kinds in favour of the dollar, the global reserve currency. That was generating a worldwide dollar shortage and putting dangerous strains on credit markets at a time when corporations and governments desperately need ready cash to respond to the Covid-19 pandemic.
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On Monday the Fed signalled that it would “do practically anything” to end the turbulence and help the American economy, writes Nick Timiraos for The Wall Street Journal. It is throwing “another kitchen sink” at wobbly credit markets. Its purchases of Treasury and mortgage-backed securities with printed money will now be unlimited. For the first time, it will also start buying “investment-grade” corporate debt, thus supporting the market at the centre of current concerns about business solvency.
The move is designed to quell two distinct crises, says Neil Irwin in The New York Times. First, financial markets are “breaking down” in some of the same ways as in 2008. Markets had become trapped in a vicious cycle: asset prices fall, creating more fear and demand for cash, generating more asset sales and causing credit markets to seize up. Second, it is trying to ensure that a liquidity crisis does not generate a mass wave of bankruptcies as otherwise solvent businesses affected by the coronavirus go to the wall. The Fed has shown that it will “do anything... on any scale” to end the dollar shortage. The Fed’s move halted the global rush into the greenback at the start of this week; the greenback fell sharply.
Politicians step up
The Fed, however, can only address the financial framework; it can’t directly pre-empt or rectify any damage done to livelihoods by the Covid-19 crisis. Enter the stimulus package, which can. But whether it will be enough to tackle the impact of the virus and redress some of the frightening forecasts of the economic damage it will cause is not yet clear. The cooling enthusiasm on equity markets by the middle of the week suggests investors remain unconvinced.
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