Get ready for another bumpy ride in global markets as the number of people affected by the coronavirus rises along with the number of fatalities, affecting global supply chains and national health care systems.
Stock markets in Asia recovered from earlier losses, but most major European indexes, except the FTSE 100, were down in Monday trading, portending continued volatility in the U.S. following last week’s 11.5% drop in the S&P 500. The index rose 1.8% to 2,992 in morning trading on Monday. Through Friday, the index had fallen 13% from its peak on Feb. 19 at 3,386, losing $3.6 trillion in market value.
Meanwhile, bond yields continue to slide, following record-setting lows in 10-year and 30-year Treasuries hit last week along with the biggest one-day drop in the two-year Treasury on Friday — all fueling expectations of a Federal Reserve interest rate cut, possibly before the Federal Open Market Committee’s next scheduled meeting on March 17-18.
On Friday, 90 minutes before the market close, Fed Chairman Jerome Powell tried to calm U.S. financial markets while acknowledging their fears: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.” He said the Fed “is closely monitoring developments and their implications for the economic outlook” and will take “appropriate” action to support the economy.
That could include a 50 basis-point rate cut, which traders now give 100% odds for at the Fed’s mid-March meeting, according to the CME FedWatch tool.
“The likelihood of a Fed cut has increased meaningfully. Depending on the spread of the virus and the market reaction, the Fed could act swiftly and aggressively,” said BofA economists, led by Ethan Harris, in their weekly note.
BofA economists cut their global 2020 global growth forecast to 2.8%, the lowest reading since 2009, and lowered their U.S. GDP growth forecast to 1.6%, which includes three quarters of a growth recession. “Broken global supply chains will deplete inventories and delay investment. But what worries us more is an adverse feedback loop between consumers and markets.”