Desperate Measures – The Moves that the Markets Don’t Appreciate

The global financial market turmoil has continued through this week, following on from last week’s sell-off.

As the spread of the coronavirus gathers pace across the West, the alarm bells ring that little bit louder.

Interestingly, however, there is no coordinated effort to combat the spread of the virus, with an array of strategies in place at present.

These strategies have been concocted by some to minimize the economic fallout, while other governments look to limit the spread and fatalities.

We have seen the EU shut its borders, with member states shutting down to contain the spread of the virus.

This excludes the UK, however, where the UK government has an altogether different strategy in combatting the virus.

For now, the only apparent way to go about limiting the spread of the virus is by adopting China’s measures.

We have seen Italy embrace the approach but have yet to see any impact as the number of deaths continue to surge.

In France, Germany and beyond, the number of cases are also surging, with the U.S officially recording cases in each of the 50 states.

Based on the latest news, it suggests that the only way to end the spread of the virus is through containment and isolation.

Demographics is not on the side of the statistics, with aging populations contributing heavily to the death toll.

Government Action and Inaction

While the global equity markets continue to take a hammering, they are not alone, with the FX markets also seeing moves not seen even during the global financial crisis.

Through the first half of the week, we saw the Pound plummet by 6.33% through to a Wednesday closing $1.1616. The slump came off the back of a 5.89% slump from the previous week.

Granted, Dollar strength has contributed to the substantial fall but so has the British government. The British Isles should have been in a perfect position to contain the virus and even allow the Pound to vie for a safe haven status.

The Government’s apparent mistake has not only been a decision to allow the virus to spread across the younger population but also to leave the borders open for too long.

When considering the size and infrastructure, it will not take long for the virus to spread nationally. More importantly, it should have been easy to contain the virus in its infancy.

The government now faces the prospect of an economic meltdown. Coupled with a now disappointing fiscal response and lackluster support from the Bank of England, it is hardly surprising that the Pound visited $1.14 levels on Thursday.

Have the markets got it wrong though?

Across Pond, we have seen inaction rather than no action, which is distinctly different.

It took far too long for the U.S administration to decide that containment was the way forward. For this very reason, we are seeing the coronavirus sweep across the U.S. Even Canada has shut its border with its friendly neighbor…

In terms of economic fallout, the U.S may be on the cusp of a far greater meltdown. It could be even more epic than the one being experienced by China.

The numbers are yet to reflect it but expect the economy and labor market conditions to be hit hard.

With consumer spending the key contributor, how fiscal and monetary policy can drive spending to support the economy remains to be seen.

The vicious cycle could have already begun, where spending tanks, lay-offs surge, and spending slides further…

This cycle could continue well beyond the lifespan of the virus itself. No economy is so nimble as to bounce back from a quarter of doom into a quarter of prosperity.

The UK Battle Plan

When looking at the UK model, there may be some method to the madness.

An incubation period of 2-3 weeks and another 2-3 weeks of downtime as a result of the virus. This is looking purely at the younger and low-risk population.

Worst case scenario, it would translate into an economic downtime of 6-weeks, assuming the entire population segment is sick at the same time.

As long as the UK government can isolate those at greater risk, the UK could be through the coronavirus well before the summer months.

The economic impact will be significant but plausibly repairable and in a relatively short period of time.

Holding Back for a Rainier Day

We then consider the monetary and fiscal policy.

Both the UK government and the Bank of England have held back from throwing in the kitchen sink. This is in stark contrast to the FED and the U.S government across the Pond.

Neither the government nor the markets can truly say which government strategy will succeed.

One can say, however, that one government and central bank, in particular, have ammunition left in case their strategy fails…

It was very clear from the reaction to the FED move on Sunday that reactive measures are not appreciated. Ironically, the U.S administration has followed suit. Even the talk of buying up stocks has failed to support ahead of the U.S open. The Dow Mini is down 655 points at the time of writing…

The Dollar may be king, and it is always a dangerous game to bet against it, but the Pound may not be down and out just yet…

At the time of writing, The Dollar Spot Index was up by 0.11% to 101.27.