US Economic Restart, Coronavirus Outbreak – Talking Points:
- Virus–hit markets could recover very sharply once the danger is judged to have passed
- However, that moment won’t come until infection rates fall
- Attempting to restart economies before that will likely offer a false dawn
There seems little doubt that the asset prices now gasping for breath under the coronavirus’ economic stranglehold could rise very sharply as soon as they can breathe freely again.
Governments all over the world have unleashed unprecedented monetary and fiscal stimulus and institutions are hoarding cash. They’ll need to put this to work as soon as they can if they want any serious yield in a world of record-low interest rates.
Growth-correlated assets such as equity, commodity currencies and energy could all be unleashed in a massive surge once the danger is judged to have passed.
State Aid Can Bolster Recovery, But Can’t Start It
However, the key point to remember here is that even the largest stimulus packages can only aid recovery once that recovery starts. They can’t produce the durable fall in infection rates which will make it safe, or even possible, to consider lifting the lockdowns now in place across much of the world. Until people can fully engage with the economy again, the measures can’t take effect. Stimulus can’t work until something is there to be stimulated.
This is something to bear in mind as the administration of US President Donald Trump contemplates allowing the economy to restart – to the extent which that is even in its gift – at a certain date, apparently irrespective of infection rate.
Trump said on Tuesday that he’d love to have the economy “open” by Easter. That’s April 12. State governors on both sides of the aisle appear unconvinced that this will be possible or wise, and it’s worth remembering that it’s the states, not the Federal government, that will have the final say on the ground.
Attempting to restart the economy before infection rates have clearly peaked would also run clearly counter to the practices of other countries. Lockdown measures have been tightened in many nations, with Singapore effectively closing its borders this week.
An early re-start may simply see the date of peak infection pushed back and delay the probable rush of cash back into markets when that happens. To that extent it may simply exacerbate the move into counter-risk, haven assets such as gold, the Swiss franc, bonds and the Japanese Yen.
A Presidency which has staked so much on rising equity markets may simply have to accept the fact that containing coronavirus, however long that takes, is the only way to win.
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— Written by David Cottle, DailyFX Research
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