Coronavirus: Shock to Supply and Demand
While last year’s heightened trade tensions weighed on global supply chains, the worldwide spread of the coronavirus has nearly brought activity to a standstill, creating the potential for a global economic shock. The outbreak has not only disrupted supply chains and reduced access to goods, but fears of the infection spreading and associated work stoppages are weighing on consumer spending. This comes at a vulnerable time as growth in many developed markets had just started to recover from last year’s lull, particularly across Europe, which is now at risk of deteriorating. Companies closely tied to the consumer—including retail, technology, and consumer goods—are already acknowledging the impacts to sales and earnings expectations. Economies reliant on tourism, particularly in Asia, have also taken a hit as consumers continue to pull back on travel plans as the virus spreads to new regions. Global economic growth will certainly take a hit; however, the full impact is likely to be felt over the course of several months.
Whatever It Takes 2.0?
Expectations are heightened for central banks, including the U.S. Federal Reserve, to take further policy action to avoid an economic collapse due to the coronavirus outbreak. G-7 central banks pledged to collaborate and take concerted action to provide ample liquidity to ensure stability in the global economy, despite limited room for monetary policy. So far, the Fed has delivered a 50-basis-point inter-meeting cut, and other countries, including Canada, Australia, and Malaysia, have also cut rates. Apart from the Fed, many central banks within developed markets most impacted by the virus are starting from a position of weakness, with already low or negative policy rates and extended balance sheets. With limited tools in their arsenals and questionable ability to stave off the virus’s economic impacts with monetary policy alone, “whatever it takes” may need some fiscal help this time around.
Equity markets rallied in response to the outcome of Super Tuesday primary elections after former Vice President Joe Biden, a perceived moderate, secured the lead among Democratic hopefuls to challenge President Donald Trump. Moderate Democrats united in the days leading into Super Tuesday with other key candidates dropping out and pledging support for Biden. For now, Biden’s strong performance has quelled investors’ fears that had gained traction in February as Senator Bernie Sanders, who is viewed as a less market-friendly candidate, rose to the lead. Notably, managed health care companies, that would be most at risk of Sanders’ “Medicare for All,” rallied on the news. With former Mayor Mike Bloomberg also dropping out, Biden looks more likely to take the nomination come July. Looking forward, markets will likely refocus on the potential threats to Trump’s economy resulting from the spreading coronavirus and the real chance it could derail his reelection prospects.
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