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Emergency Central Bank Actions

March 16, 2020
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The world has seen asset market turmoil over the last few weeks fueled by panic over the coronavirus situation. The fear is largely driven by the virus’ capacity to transmit quickly with little person to person contact as neither the death rate nor the death toll are daunting to this point. Businesses are closing and or asking employees to work from home. Schools, sporting events and gatherings of most any sort are closing or postponing in order to let things settle down. The result in financial markets has been a panic buy in safety (U.S. Treasury notes and bonds) and panic sell and pretty much everything else. Most major stock indexes around the globe are in bear market territory (more than 20% off of their high price.) The volatility index VIX is at its highest level since 2008.

Central banks around the globe are responding with stimulus to stave off the economic downturn that is happening – here are actions just within the last few days…

  • Bank of New Zealand cuts short term interest rates by .75% to record low .25% - Says asset purchases will be next
  • Canada cuts overnight lending rate to .75% from 1.25% in emergency action - Canada will establish credit support program to provide additional C$10 billion to businesses and stimulate the economy
  • German Finance Mininister Scholz: Germany will have no limit on credit program form companies and Germany will spend billions of Euros to cushion economy. A safety net will be set up for “virus-hit” companies.
  • PBoC (China) cuts Required Reserve Rate for some banks this morning, releasing $79B of liquidity
  • ECB’s (European Central Bank) Villeroy—“We can distance ourselves from the capital key to purchase more of some countries’ debt if required”
  • European Union President Von Der Leyen unveiled emergency measures to tackle the economic fallout, including flexibility on budgetary and state aid rules; 37 Billion Euro fund for coronavirus support
  • Italy may spend up to 16 Billion on stimulus
  • BoJ (Japan) ups bond buying overnight in unannounced move (offering to buy $1.9B), while sources story says that QE interventions will grow (e.g. Commercial Paper, ETFs, Corp Bonds)
  • RBA (Australia) added $5.5B of liquidity through daily repo ops, largest since at least ‘13
  • South Korea banning short selling for 6m; Italian CONSOB bans short selling; Spain’s CNMV banned short sales on 69 stocks which fell over certain amounts yesterday; UK’s FCA temporarily prohibits short selling in certain instruments; French watchdog also investigating short selling ban.
  • Norges Bank (Norway) cuts rates 50bps to 1%, is prepared to ease further; cuts countercyclical buffer to 1% from 2.5% with immediate effect
  • Riksbank (Sweden) lends 500 Billion crowns to safeguard supply of credit while Ingves states can buy local govt and corporate bonds and “can do currency intervention & cut rates if we think it’s needed.”

Last but certainly not least, here in the U.S., the Fed slashed benchmark interest rates by 100 basis points to a band of between 0% and 0.25%. This underscored the growing fears of the worldwide recession, the surprise announcement came just days ahead of the Fed’s scheduled March monetary policy meeting on Tuesday and Wednesday — and less than two weeks after the Fed had also unexpectedly cut rates by 50 basis points to a range of 1.00-1.25%. But wait, there’s more – the Fed also committed to $700 Billion in asset purchases which are predominately treasuries and mortgage backed securities. They also slashed reserve requirements for thousands of banks to zero. Terms on lending at the “discount window” and on dollar swap lines have also been eased.  Some question the wisdom of firing so many bullets so quickly – suspecting that more Fed action will be necessary in the ensuing days and weeks. Was this too much too soon from the Fed?

Right now, uncertainty has spilled over into panic. Liquidity, meaning the ease of getting in or out of investments, has dried up and intraday volatility is wild up and down. Historically, events like this have led to opportunity and when the dust settles, we suspect this event will be the same. Of course, the question is when. Looking at Hong Kong as an example, they are about eight weeks into the situation where they really started shutting things down. They are beginning to get back to normal there – and the outbreak really never got out of hand. Hopefully we can tighten things down and get a similar outcome here in the states but stay safe and stay tuned.