The European Central Bank did not reduce its policy rate of interest, something that many investors and analysts expected them to do. The expected reduction was not great, only 10 basis points, but a reduction was expected, nonetheless.
Jack Ewing writes in the New York Times,
“The European Central Bank joined other central banks Thursday in taking a forceful action to prevent the spread of the coronavirus from undermining the global economy.”
“But,” he continues, “the bank disappointed expectations it would cut interest rates as the eurozone hurtles toward recession.”
As Martin Arnold wrote in the Financial Times, European bond markets reacted negatively to this announcement with Italian government bonds suffering their biggest one-day fall for almost a decade.
The reaction was so great, Mr. Arnold writes, that Philip Lane, the chief economist for the ECB had to put out a blog post on Friday to soothe the market disruption caused by the lack of action.
INVESTORS WANT A COORDINATED RESPONSE
The investment community seems to want central banks and other to work together, coordinate their actions and look like they all are in one-accord in their efforts to stem the effects of the spread of the coronavirus.
We got an earlier hint of this when the Federal Reserve moved dramatically - on its own.
The Federal Reserve cut its policy rate of interest by 0.50 all by itself and the US stock market dived. The central banks of Canada and England followed with rate cuts, but these came later and seemed to stand-alone by themselves.
This does not help build confidence in financial markets. As I have written before, “Markets and Central Banks: Now More Than Ever, the World Needs to Work Together.”
This just adds to the belief that the governments are not working together, taking into account the European response to the talk from the Oval Office on Wednesday evening when President Trump indicated that the travel ban impacting Europe was a unilateral decision.
MARKET RESPONSE TO THE FED MOVE
Not only did the US stock market drop after the Fed’s move to lower its policy rate of interest, the value of the US dollar dropped reflecting the change in relative interest rates between the US and Europe.
The value of the US dollar relative to the Euro in late February had been as low as $1.0800 to the Euro. After the Fed move that was not followed in Europe, we see that on March 9 that the dollar value of the Euro closed at $1.1442.
The exchange rate has moved back a little since then, it took $1.1126 to purchase one Euro on Friday morning, but the market reaction following the Fed cut shows how sensitive the financial markets are to what is going on with respect to combatting the spread of the virus.
EASING TAKEN BY THE EUROPEAN CENTRAL BANK
The European Central Bank did take other actions to “alleviate the economic chaos caused by the spread of coronavirus.”
Included among these actions are the expansion of the ECB’s quantitative easing program with €120 billion of extra bond purchases, the launching of a new program of cheap loans to banks, and the easing of some capital requirements with respect to commercial bank activity.
Christine Legarde, the president of the ECB, also make the comment that the eurozone governments should become more active in taking actions to combat the economic issues.
Even with these actions, investors and analysts responded to the remark made by Ms. Legarde that “We are not here to close (interest rate) spreads, this is not the function or the mission of the ECB.”
Investors seemed to ignore the easing actions and focused primarily upon the justification Ms. Legarde gave concerning the failure to move the policy rate, even if the expected move was only 10 basis points.
The easing efforts are aimed at the growing fears of an economic recession taking place in Europe. The signs of a European recession are already there.
It is important, I believe, to call attention to the fact that investors and markets are so sensitive right now to factors that can build trust or to those factors that destroy trust.
The picture that people and nations are working together seems to be one of the key issues that investors and markets are looking for. It this “working together” seems to be absent, this reduces trust in what is being done to minimize the impacts of the coronavirus spread.
The real leaders, I believe, will be seen to be the ones that reach out, realizing that this whole affair requires a community effort.
David Brooks, writes in the New York Times this morning about how things like pandemics can drive people apart and why this is exactly the wrong answer to the problem.
Given the reaction of the financial markets over the past couple of weeks, investors seem to know this fact. Investors seem to respond positively to the news that people and governments are working together. Markets drop with the reverse is true and trust is destroyed.
There is lots and lots of uncertainty “out there,” and this adds to the sensitivity that investors and others have to any movement in “trust.” Volatility loves such an environment.
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