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”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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”.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
Christmas at Chatsworth: review of The Cavendish Hotel at Baslow
MoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
By Dr Matthew Partridge Published
-
Tycoon Truong My Lan on death row over world’s biggest bank fraud
Property tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
By Jane Lewis Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated