Global Stocks Fall on Coronavirus Concerns, Central Banks Meet This Week
Last Week Review
The equity rally from mid-March sharply reversed course late last week as virus cases and hospitalization data in the U.S. sparked some concern over a pandemic reacceleration. The Federal Reserve pledged to support the growth outlook for as long as needed, but post-meeting commentary alluded to a sobering economic recovery path. Concerns over a disconnect between the impressive equity market rebound and lackluster economic outlook likely further dampened sentiment. Global equities fell 4.1%, with U.S. equities declining 4.9%. U.S. interest rates edged lower; the 10-year Treasury yield fell 19 basis points to 0.70% while the 2-year yield was roughly flat at 0.19%.
Localized Outbreaks Threaten Virus Progress
Virus cases in South Asia, a pandemic hotspot, surged last week. The new-case rate in the U.S. declined, but upswings in some states (Arizona, Texas, and California) have caused unease. Irrespective of whether increased economic activity is the cause of the surges, localized outbreaks threaten to complicate a smooth economic recovery. Medical professionals are bracing for a reacceleration of the virus this year. A decreased political appetite for substantially more economic pain and better information on how to treat virus patients are of a handful of factors supporting fewer lockdown restrictions in the face of a virus second wave. Investors will continue to monitor health developments as they consider the economic implications of different virus trajectories.
Fed Firms Dovish Policy Alongside Grim Outlook
Nearly all Federal Reserve officials expect the federal funds target rate to remain at the 0.00–0.25% range through 2022. The Fed vowed to maintain at least its current pace of asset purchases over the coming months. Ahead of its meeting, the central bank expanded its Main Street Lending Program to smaller businesses and introduced more favorable loan terms. Despite recent investor optimism for a strong economic rebound following healthier high-frequency and U.S. labor data, post-meeting comments by Chairman Jerome Powell painted a grim outlook on inflation and employment. Powell does not see the rebound in recent U.S. labor data as evidence that the labor market will return to its pre-virus strength soon. Many investors expect the Fed to further ease policy in September.
Concerns Increase on Equity Rebound
Prior to last week’s pullback, U.S. equities had rebounded 45% from mid-March lows. The rally occurred at a time when economic growth and corporate fundamentals have been markedly damaged. Policy support can still provide a temporary floor for equity markets, but rebound gains are likely to reverse if the virus resurges and economic growth continues to disappoint.
This Week Preview
Race Continues for Historic Vaccine Development
Health expert Dr. Anthony Fauci warned that the virus has room to run, emphasizing the need for a vaccine. Moderna will move into the final testing phase in July. AstraZeneca and Johnson & Johnson are projected to follow later in the summer and fall. Historically, fewer than 10% of experimental vaccines make it to licensure through a process that takes an average of over 10 years. Novel technologies and a global need may speed up the timeline. For now, public health measures and virus cases will remain under watch.
Accommodative Monetary Policy Remains Crucial
The Bank of England, Bank of Japan, Central Bank of Brazil, Reserve Bank of India and Central Bank of Russia are of numerous central banks expected to meet this week. Nearly all monetary policy bodies have vowed to mitigate virus-driven economic damage to the best of their ability for however long as needed. Accommodative monetary policy alone is not enough for an economic rebound, but it has and will continue to be key to a strong recovery.
Window Shrinks for Added U.S. Government Support
Additional U.S. fiscal support packages are likely becoming increasingly difficult to pass through Congress as the presidential election draws closer and some economic data rebounds. European Union leaders will meet late this week to discuss a proposed €750 billion recovery fund. Like monetary policy, fiscal policy support remains needed for a strong economic recovery.
See our latest coronavirus insights.
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