Financial Times 05Mar2020

2 ★ FINANCIAL TIMES Thursday5 March 2020

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B R E N DA N G R E E L E Y— WASHINGTON
C O L BY S M I T H A N D J E N N I F E R A B L A N
NEW YORK

When the US Federal Reserve and mar-
kets move together it is difficult to figure
out who is watching whom — former
Fed chair Ben Bernanke called it the
“hall of mirrors” problem.
Giving investors what they want is
precisely what the Fed seemed to do on
Tuesday, when it announced its first
emergency rate cut since the height of
the financial crisis. But Fed chair Jay
Powell laid out a simple justification for
the Fed’s actions.
He suggested that when therewas
great uncertainty and no historical
precedent for what is about to happen,
the best thing is to do whatever you
can. As the number of coronavirus cases
in the US passed 100, Mr Powell felt he
had no other choice, although he was
forthright about what he did not know.

“For us what really matters is not the

epidemiology, but the risk to the econ-

omy. So we saw a risk to the economy

and we chose to act,” he said.

The move came after days of ignalss

from markets. A week ago investors

assigned zero probability to a ate cut atr

the Fed’s next scheduled meeting on

March 18, according to analysis by CME

Group; by Monday, they were already

anticipating two more cuts.

The Fed is doing “what the bond mar-

ket says, with a lag”, said Jeffrey

Gundlach, who oversees more than

$155bn in assets. The bond market “def-

initely helped to encourage” the Fed to

take action, he said.

Rick Rieder, BlackRock’s chief invest-

ment officer of global fixed income, said

the Fed “almost had to do it” given how

elevated investors’ expectations were

for additional easing.

Loretta Mester, president of the

Cleveland Fed and a voting member of

the Fed’s rate-setting committee, ech-

oed Mr Powell’s uncertainty in a speech

in London. “Both the magnitude and

duration of the economic effects of the

virus are highly uncertain,” she said.

Unknowns included the actions of

other countries and public health offi-

cials, and the characteristics of the dis-

ease itself, she said.

The Fed is also likely to be looking at

more than just last week’s virus-fuelled

market rout. Turbulence in the markets

forced companies to postpone debt

deals last week; there were no new cor-

porate bonds or leveraged loans sold in

the US, according to data from Refinitiv.

Globally just $41bn of debt was sold, less

than half theprevious week’s total.

“You had better believe that this is

one of the things Fed chair Powell was

paying attention to,” said Danielle

DiMartino Booth, chief executive of

Quill Intelligence, a research firm, and a

former adviser at the Dallas Fed.

Several industries are already experi-

encing a slowdown: travel and tourism

companies, and manufacturers that rely

on components from China. According

to Claudia Sahm and David Wilcox, both

former heads of research divisions at

the Fed’s Board of Governors, policy-

makers are probably talking regularly

to their extensive networks of regional

business contacts. “They almost cer-

tainly activated that network last week

if not the week before,” said Ms Sahm.

This leaves open the possibility that

Tuesday’s emergency rate cut was just

the first of a series of policy easing meas-

ures. Mr Powell said the Fed had not yet

considered alternative policies such as

asset purchases.

But some economists and investors

say monetary policy would have limited

effectiveness. “I don’t think [rate cuts]

will have a true economic impact at all,”

said Mr Rieder, noting instead that poli-

cies to help small business lending,

among others, would be more effective.

“[Coronavirus] is completely unknown

and unlike virtually anything else. It is

an exogenous shock that is not much

different than [the financial crisis in]

2008, because you just don’t know how

the world will react.”

That piles pressure on to the US gov-

ernment to prepare for fiscal stimulus;

other governments hit by coronavirus,

including South Korea and Italy, have

already launched spending packages.

Central bankers across the developed

world have warned for years that,

because interest rates are so low, their

ability to combat a sustained global eco-

nomic slowdown is limited, in compari-

son with the fiscal options available to

governments.

Mr Bernanke and Janet Yellen,

another former Fed chair, have said the

Fed might not have enough tools to

respond to the next downturn, and

asked Congress for a better plan for a fis-

cal response. Speaking to Congress last

month, Mr Powell added to the clamour.

But with the White House non-com-

mittal on a stimulus, a swift rate cut was

the best the Fed could do. “They’re in a

situation where there’s really nothing to

be lost and there might be something to

be gained,” said Mr Wilcox.

FT Big Read age 7p

Banking reaction age 11p

See Markets Insight

J O H N R E E D— BANGKOK

ST E FA N I A PA L M A— SINGAPORE

The street market in Ubud,Bali,

wasunusually quiet on a recent after-

noon. “At this time of day, Chinese

tourists would normally be crowding

through here,” said Ketut, who sells

bags and wooden crafts to tourists. His

sales have halved since the coronavirus

outbreak began in January.

The loss of the China trade has hit south-

east Asian economies particularly hard,

as tourist groups pull out, Chinese sup-

pliers halt deliveries to manufacturers

and imports of everything from Thai

and Malaysian electronic equipment to

Vietnamese dragon fruit grind to a halt.

The crisis has laid bare just how

dependent these countries are on the

world’s second-largest economy, a top

trading partner and source of foreign

visitors for countries across the region.

It also offers a glimpse of the potential

risks to Europe and the US as the epi-

demic spreads. Worries about the

impact of coronavirus prompted some

central banks to cut interest rates to

cushion any lingering effects. TheUS

Federal Reserve cut its benchmark rate

by half a percentage point on Tuesday,

hours after Australia and Malaysia

slashed their interest rates.

“If the quarantine continues for more

than two or three months, it will nega-

tively impact our country,” said Nuttab-

hat Jarach, a worker at the tourist assist-

ance centre in Bangkok’s Don Mueang

airport. Passenger numbers are

down 40-60 per cent in February com-

pared with a year ago, according to the

Tourism Authority of Thailand.

China is the top source of visitors to

Thailand, as well as Singapore, and

accounted for about a quarter and a fifth

of arrivals of the two countries respec-

tively last year.

Economists trying to project the eco-

nomic cost of coronavirusoften com-

pare it to the Sars outbreak in 2003 —

with the caveat that 17 years ago, China

was not yet the dominant regional eco-

nomic actor that it is today.

The degree of economic integration is

especially clear inmanufacturing. This

is perhaps starkest in the case of Viet-

nam, where semi-finished and finished

goods cross the two countries’ land bor-

der regularly — and sometimes more

than once — in the making of a product.

Because of disruption to trucking

routes, South Korea’sSamsung urnedt

to air freight for some of the parts it

sources from China for its two factories

in Vietnam. However, this is not an

option for lower-margin sectors such as

textiles, where producers need to use

sea transport, find non-Chinese suppli-

ers or dip into their inventories and

hope the crisis ends soon. “If this goes on

for three or six months, no problem,”

said Alex Tran, director of Lac Viet

Handicraft Export Co, a Danang-based

manufacturer.“But if it lasts to the end

of the year, this will cause difficulty.”

Sriram Muthukrishnan, head of trade

product management at DBS, the

Singapore-based bank, said that some

ofits customers expected a short-term

dip in orders of 5-10 per cent.

“The coronavirus is forcing people to

recognise even more strongly how much

of the intermediate trade in Asia is

dependent on China,” he said.

Governments are responding with

new policies. Singapore last month pro-

posed a S$6.4bn ($4.6bn) programme

to counter the outbreak’s economic

impact. The package was announced a

few days after the city state slashed its

growth forecast by a percentage point to

-0.5 per cent to 1.5 per cent from 0.5 to 2

per cent. Malaysia last week unveiled a

Rm20bn ($4.7bn) stimulus package.

Thailandis looking at a stimulus

measures.Indonesia nda Thailand aveh

mentioned coronavirus as a factor when

they made recent quarter of a percent-

age point rate cuts.

Authorities in the region are alsotry-

ing to unblock the arteries of trade,

including at the Vietnamese-Chinese

border. However, some manufacturers

say the disruption ould have perma-c

nent effects on how their supply chains

are configured — and potentially benefit

some south-east Asian suppliers.

M a l ays i a’s M ay b a n k s a i d i n

a notethat the coronavirus crisis would

reinforce a move away from China that

was under way because of the US-China

trade war.

Fed and markets joust in ‘hall of mirrors’

Investors expect more action after response to outbreak but policymakers say fiscal policy should take the strain

M A RT I N A R N O L D— FRANKFURT

Christine Lagarde has been in charge of
the European Central Bank for only four
months but her decisive test has come
early: how to respond to the economic
impact of coronavirus.
The US Federal Reserve’semergency
rate cut on Tuesdaypiled pressure on
other central banks to take action, too —
none more so than the ECB, whose rate-
setting committee meets next week.
As well as being the first major central
bank to hold a scheduled meeting since
coronavirus hit the global economy, the
ECB is also among those with the least
room for manoeuvre, having failed to
lift rates once the economy started to
improve as the Fed has done several
times in recent years. Eurozone interest
rates are at record low of minus 0.5 per
cent and debate about the adverse
impact of negative rates has intensified
across Europe in recent months.
Ms Lagarde has so far sought to resist
calls for an early rate cut.On Friday,Jay
Powell, Fed chairman, promised to act
“as appropriate” to support economic
growth — asignal of the upcoming rate
cut which he then announced on Tues-
day — but Ms Lagarde has said only that
the ECB is “ready to take appropriate
and targeted measures, as necessary
and commensurate with the underlying
risks”.
After the 2008 financial crisis
erupted, the ECBwas reputed for being
slower than other major central banks
to take action; Ms Lagarde’s hesitancy
risks recreating the impression that the
ECB is once more behind the curve.
By contrast, the Bank of Japan has
promised to inject liquidity into
markets, and Bank of England gov-
ernor Mark Carney said on Tues-
day that he wasprepared to
cut rates if necessary.
“She is really stuck
between a rock and a hard
place,” said Frederik
Ducrozet, strategist at

Pictet Wealth Management. “No one I

know expects a rate cut to have any

impact on the eurozone economy — it

could even be counterproductive — but

there may be no choice.”

The case for monetary policy action is

clear: economists are slashing their

growth forecasts, with many predicting

the eurozone will slide into a recession

in the six months to June, its first since

the bloc’s sovereign debt crisis in 2012.

Coronavirus is causing serious

economic disruption in Europe:

companies are restricting staff

travel, tourists are calling off

their plans, airlines are scrap-

ping flights, sporting events are being

cancelled and factories are preparing

for supplies of Chinese goods to dry up.

Supermarket shelves across Germany

have been left bare in recent days as

shoppers buy up all the toilet paper,

tinned tomatoes, pasta and disinfect-

ants they can find, a behaviour nick-

namedHamsterkäufe, or shopping like

hamsters. Yet stockpiling is unlikely to

provide along-term boost to the

economy.

Adding to Ms Lagarde’s dilemma,

there is little hard economic data availa-

bleto show how hard the economy has

been hit.That is unlikely to changeby

the time the ECB governing council

meets on March 12, when it is also due to

update its economic forecasts.

Ms Lagarde’s statement on Monday

hinted that ECB officials are working on

the expansion of its programme of

cheap loans for banks, which is designed

to provide incentives for them to keep

credit flowing to companies via the tar-

geted longer-term refinancing opera-

t i o n (T LT RO) w h i c h t h e E C B

relaunched last year.

The ECB could offer loans to banks at

negative interest rates on the condition

that they keep lending to small busi-

nesses affected by theoutbreak, either

by repurposing its existing TLTRO pro-

gramme or launching a new one.

Mr Ducrozet said the ECB might need

to go further by cutting rates and

increasing its bond purchases ifthe euro

keeps risingagainst the US dollar,

fuelled by the Fed’s latest move.

Investors are pricing in a more than

75 per cent chance that the ECB will

cut rates to minus 0.6 per cent next

week and lower them further later in the

year.

“The ECB will probably not want to

forgo the signal effect of an interest-rate

cut in order to make a greater impres-

sion on the market,” said Jörg Krämer,

chief economist at Commerzbank.

However, some economists doubt

whether cutting rates will do much to

ease the economic pressures of corona-

virus.

Measures introduced to contain the

disease have created a supply shock for

the economy, but monetary policy is

generally more effective in addressing a

shortfall in demand rather than disrup-

tions to supply.

“On the supply side there is not much

the ECB can do, beyond providing

liquidity to specific sectors affected by

the virus,” said Danae Kyriakopoulou,

chief economist at central bank think-

tank OMFIF.

Ms Lagarde’s task is further compli-

cated by divisions in the ECB’s main

rate-setting committee, which blew up

into a bitter public spat last autumn

when it last cut rates and restarted its

bond purchases, shortly before Ms

Lagarde became president.

Tail Risk age 11p

K AT R I N A M A N S O N— WASHINGTON

Scientists funded by the US defence

departmentplan to extract coronavi-

rus antibodies from the blood of a

recovered patient o developt treat-

ments to protect frontline healthcare

workers and military personnel.

The breakthrough science would rely on

injecting the genetic instructions into a

human to make antibodies to fight the

virus, giving immediate but short-term

protection. Administering a vaccine has

a long-lasting effect buttakes more than

two weeks to prime the immune system.

Amy Jenkins, an infectious diseases

expert who is leading the pandemic pre-

vention programme at the Defense

Advanced Research Projects Agency,

told the Financial Times she had funded

four groups to try to identify antibodies

in blood from a single US patient who

has fully recovered from coronavirus.

“It will take at least three weeks to

find the antibodies — everybody is

really relying on one person’s immune

response,” said Dr Jenkins. She said the

endeavour was high-risk because it

remained unclear whether recovery

relied on production of large numbers of

antibodies or other parts of a body’s

immune system response.

If Darpa’s effort works, the longer-

term aim would be to turnantibodiesof

patients who recover fromdiseases into

treatments formany illnesses within 60

days. But Dr Jenkins said the earliest a

treatment forthe virus could emerge

would be six months from now.

“If we find a very good antibody, if

they can make it very quickly in six to

eight months, we could have an impact

on this current outbreak,” she said. No

vaccine is expected to complete clinical

trials and be ready to fight a coronavirus

pandemic in less than a year.

Darpa, which leadsscientific research

for the entagon and is credited withP

creating the internet, s likely to handi

off the science to a private company to

manufacture such treatments.

ECB. onetary policyM

Lagarde faces pressure to lower interest rates

Antibodies research

US defence

department

joins hunt for

treatments

Regional fallout

Loss of China trade and tourists hits south-east Asian nations

Virus fight: a

woman wears

a face mask in

Denpasar, Bali,

where tourist

numbers are down

Roman holiday: tourists pose at the

Spanish Steps in the Italian capital,

almost deserted due to the

coronavirus outbreak. Below,

Christine Lagarde —Claudio Peri/EPA-EFE

‘She is

really stuck

between a

rock and a

hard place’

Frederik

Ducrozet,

Pictet

Hesitancy risks recreating

impression central bank is

once more behind curve

C O R O N AV I R U S

On Tuesday, the

Fed announced its

first emergency

rate cut since the

height of the

financial crisis

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STOCK MARKETSS&P 500 Mar 302365.932361.13prev %chg0.20WorldMarkets

Nasdaq CompositeFTSEurorst 300FTSE 100Euro Stoxx 50Dow Jones Ind7369.5220703.38 20659.32 0.211500.725902.743481.675897.557373.72 -0.063475.271493.750.180.470.

FTSE All-ShareCAC 40Xetra DaxNikkeiHang Seng19063.22 19217.48 -0.804011.0124301.09 24392.05 -0.3712256.43 12203.00 0.445089.645069.044011.80 -0.020.

FTSE All World $297.99297.730.

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