Central banks' easy money dulls the financial effects of the coronavirus outbreak

Investors, confident that central bankers will step in with more easy cash if the coronavirus epidemic worsens, have driven up both stockmarkets and bond markets.

China’s battle with the coronavirus has begun to resemble a “Mao-style” mass mobilisation, say Raymond Zhong and Paul Mozur in The New York Times. “Battalions” of Communist Party representatives, “uniformed volunteers” and local “busybodies” are carrying out “one of the biggest social control campaigns in history”. With housing complexes sealed off and train stations policing movement, at “least 760 million people” are now thought to be living under some form of residential lockdown. With many factories and businesses unable to function, production in the world’s second-largest economy is coming under increasing strain (see box below).

The twin bubbles grow bigger

Suggestions that the spread of Covid-19 is slowing have cheered stockmarkets. Global equities have continued to rally and are now above their January highs, notes Rupert Thompson of Kingswood. China’s CSI 300 index is now up 10% since the start of February. 

Markets are betting on the speedy containment of the outbreak and a prompt economic rebound. Yet there is still a real risk that things take a turn for the worse; “epidemiologists seem to be much less sure than the markets that the epidemic is under control”.

Bonds are also rallying, notes Randall Forsyth for Barron’s. “Despite paltry yields” investors have “poured a record $23.6bn into fixed-income mutual funds and exchange-traded funds” over the past week and are adding about $1trn every year. This “twin bubble” phenomenon in stocks and bonds is rare – the two asset classes normally move inversely. As doctors rush to find a cure for the coronavirus, a familiar bromide is already inoculating financial markets: the promise of “lots of easy money”. Investors are confident that central bankers will step in with more stimulus if the epidemic worsens, helping to drive the joint stock and bond rallies. 

Is it 2005 all over again?

“It is hard to find a central bank today with a tightening mission,” says Gillian Tett in the Financial Times. Easier money in America, Europe and emerging markets helped global asset prices soar last year. With bond returns falling, mainstream investors are turning towards riskier investments, such as US corporate debt. The Chicago Fed’s financial conditions index shows that “funding is even cheaper today than during the pre-crisis bubble”. According to one “hedge fund luminary”, there is unlikely to be “a crunch this year, but this feels like 2005. The music is playing so everyone is dancing, but the risks are piling up”.

One popular alternative to bonds these days is high-quality blue-chip stocks, says Michael Mackenzie in the Financial Times. Yet some investors question whether this crowding into a “narrow cohort of quality and growth companies represent a financial stability accident waiting to happen”. With valuations stretched, “the reckoning, whenever it comes, will be painful”.

Recommended

Bitcoin is down more than 50% since its all-time high. What is going on?
Bitcoin & crypto

Bitcoin is down more than 50% since its all-time high. What is going on?

Bitcoin, the world's most popular cryptocurrency, is trading more than 50% below its all-time high in November. Saloni Sardana explains why the digita…
24 Jan 2022
Tech stock carnage: do you think Apple, Amazon and Alphabet will save you? Think again
Tech stocks

Tech stock carnage: do you think Apple, Amazon and Alphabet will save you? Think again

As tech stocks continued to slide, there is a view that you can escape all the carnage by holding really high quality profitable stocks. That view is …
24 Jan 2022
Which assets will benefit as the “jam tomorrow” bubble pops?
Investment strategy

Which assets will benefit as the “jam tomorrow” bubble pops?

With tech stocks, cryptocurrencies and many other “long duration” investments crashing hard, the “jam tomorrow” bubble looks to be bursting. John Step…
24 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Interest rates might rise faster than expected – what does that mean for your money?
Global Economy

Interest rates might rise faster than expected – what does that mean for your money?

The idea that the US Federal Reserve could raise interest rates much earlier than anticipated has upset the markets. John Stepek explains why, and wha…
6 Jan 2022