Investors fear that monetary easing is losing its potency
Investors say they are losing faith in the power of central banks to tame market turmoil, after a series of dramatic interventions in recent weeks did little to calm unprecedented levels of volatility.
Since the financial crisis of 2008-09, investors have relied on central bankers to step in with interest rate cuts and asset purchases during periods of market stress, and policymakers have often delivered. But as the global spread of coronavirus sent stocks into a bear market in record time this week, and as strains emerged in the all-important US Treasury market, that dependency appears to have been tested to breaking point.
“Monetary policy is powerless to stop this,” said Luca Paolini, chief strategist at Pictet Asset Management. “The era of rate cuts and quantitative easing is probably over. It’s not the solution for a pandemic and it won’t be enough to help with the recovery. What we need is a co-ordinated fiscal response, and markets are effectively forcing governments to act.”
An emergency half percentage-point rate cut by the Bank of England on Wednesday — echoing a similar move by the US Federal Reserve eight days earlier — kicked off the latest round of easing. But the move had little apparent impact on markets, coming the day before the FTSE 100 index’s biggest fall since 1987.
Investors said hopes for European fiscal stimulus — with Germany announcing a pledge of unlimited cash for businesses hit by coronavirus — helped markets to steady on Friday. The Stoxx Europe 600 gained 1.4 per cent, following its worst single session in history on Thursday, down 11 per cent.
The European Central Bank disappointed some investors on Thursday by refraining from cutting rates, fearing potential damage to the banking system from pushing rates even further below zero. ECB boss Christine Lagarde did, however, announce a package of an extra €120bn of asset purchases this year and a new round of ultra-cheap loans to banks. But the measures did not stem the tide of selling.
“The reaction to the ECB shows that the market thinks monetary policy is running on an empty tank,” said Salman Ahmed, chief investment strategist at Lombard Odier.
The Federal Reserve has similarly struggled to pacify markets. After the US central bank delivered its emergency cut last week, the first since the global financial crisis, markets initially rallied — only to sell off sharply within the hour.
“That emergency rate cut — it worked. It worked for about five minutes,” said David Lafferty, chief market strategist at Natixis Investment Managers.
Investors still expect the Fed to make a big move at its scheduled meeting next week, despite scepticism that rate cuts alone will be sufficient to shield the US from the economic damage brought on by coronavirus.
Markets expect at least a three quarter-point reduction in the Fed’s main policy rate, according to futures prices compiled by Bloomberg. Some strategists expect the Fed to go further and cut by a full percentage point, bringing policy rates down to zero at the lower bound for the first time since 2015.