Week in Review: Central Banks Respond to the Coronavirus Outbreak

Major stock market indexes ended the week mixed as extraordinary volatility driven by COVID-19 fears continues. Possible policy responses from the U.S. and other governments to the COVID-19 outbreak took centre stage this week. G-7 finance ministers and central-bank governors met on Tuesday, pledging to use “all appropriate policy tools” to safeguard the global economy from the damaging effects of coronavirus. However, the meeting fell short of details – particularly about fresh fiscal stimulus and coordinated interest rate cuts.

The Federal Reserve lowered interest rates by 0.5% in its first emergency move since 2008 as a response to the growing threat from the coronavirus outbreak. The U.S. 10-Year treasury yield declined to a record low 0.77%, as investors continue to flock to safe assets and expect more central-bank easing. Meanwhile, the Bank of Canada and Australia’s Central Bank also cut rates by 50 bps and 25 bps respectively.

European Central Bank (ECB) President Christine Lagarde said in a statement that the ECB is “ready to take appropriate and targeted measures” to counter the economic impact of the coronavirus, signaling a greater willingness to act. The statement followed similar comments from the Bank of Japan on Monday.

In China, the first significant economic release for February, the official purchasing managers’ index (PMI) for manufacturing, fell to a record low – 35.7 from 50.0 in January (50 is the threshold between expansion and contraction). This reading came in well below most forecasts, signalling that China’s economy may contract worse-than-expected in the first quarter.

For the week, global equities were mixed. In the U.S., the Dow Jones (+1.79%), S&P 500 (+0.61%) and Nasdaq (+0.10%) posted positive gains. Asian & European markets were mixed with the Shanghai Composite Index (+5.35%) ending the week in positive territory whilst returns were negative for the Nikkei 225 (-1.86%), Euro Stoxx 50 (-2.93%) and FTSE 100 Indices (-1.79%).

Market Moves of the Week

Locally, 4^th quarter 2019 GDP declined by 1.4% (quarter-on-quarter), compared with market expectations of a decrease of 0.1%. For 2019 the South African economy grew by 0.2%.

Public Enterprises Minister Pravin Gordhan said that a plan to deal with Eskom Holdings SOC Ltd.’s 454 billion rand ($30 billion) of debt is expected to emerge by mid-year, including an “integrated way” of dealing with the debt, including climate finance, operational improvements and splitting the business into separate units.

The JSE All Share Index ended the week down 1.97%, with industrials (-3.45%), financials (-1.39%) and resources (-1.91%) all softer.

Chart of the Week

In this week’s chart, we look at the U.S. 10-Year Treasury Yield.  Since 1871, the benchmark treasury yield had never before dropped below 1.0%. The global flight to safety of government debt has seen investors pile into U.S. Treasuries and has sent the yield on the 10-year note to record lows. The yield on the benchmark 10-year Treasury sank to an all-time intraday low of 0.68% on Friday (closing at 0.77%) . The plunge in yields comes on the back of the coronavirus outbreak creating fear of a global slowdown.

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