The Federal Reserve once again took steps aimed at restoring liquidity in markets today, given an increase in risk aversion and volatility due to the pandemic`s accelerated development in the last few days.
The FED has decided to cut the federal funds rate in more than 100 base points to set it at 0%- 0.25%, level not seen since 2008. Additionally, it announced the purchase of assets in the market of up to 700 billion dollars in new quantitative easing, 500 billion in bonds and 200 in mortgage backed securities. According to statements made by Jerome Powell, president of the FED, the steps taken are aimed at supporting credit in addition to restoring and supplying markets with liquidity and providing the overall system with stability. Powell has not yet opened a door to negative interest rates like other economies in Europe or Japan. Furthermore, he pointed out economic activity in the second quarter will be very weak.
The Federal Reserve`s actions give a glimpse of an important effect of Covid-19 on the United States economy. Several companies, including Apple and Nike, have decided to close all of their stores outside of China, while United States airline companies have announced they have reduced international flight frequency.
Reactions in markets have been important. In Asia, the US federal funds rate is set at 0.32%, level never seen before – and below last week`s 0.4%. The peso has reached a level of 21.93 per dollar and United States stock exchange futures expect a negative opening of over 4.5%, overall.
All of these are signs of greater risk aversion and a flight to quality. As of today, and according to the Jon Hopkins online page that monitors the pandemic`s developments in real time, 168,074 people in the world have been infected with coronavirus, and the infection rate has significantly accelerated in the last few days.
It`s inevitable to think of a deep economic slowdown given the pandemic`s effects on aggregate supply and demand, which is why the virus`s impact on company earnings will be considerable. According to Goldman Sachs, 2Q20 earnings will shrink more than 15% regarding the S&P500. For this reason, we aren`t ruling out greater corrections in stock markets.
Nevertheless, we can still estimate the overall worldwide economic recovery could accelerate in the second half of 2020, when the number of cases is expected to have reached a peak start to decline.
In the meantime, we can expect volatility and risk aversion to continue in markets, as well as greater actions on behalf of governments and major central banks.
Intercam Casa de Bolsa.