The world economy continues to be driven by Coronavirus. Europe is now the main epicentre of the epidemic. Coronavirus quantitative easing is here, and not only by FED.
The fastest infections during the weekend were happening in Spain, but not only there. The set of measures taken over the weekend is likely to paralyze the euro area economy. To a large extent, it will do it at the turn of the first and second quarters. Spain, like Italy, has entered full quarantine, and France is very close to this. Germany has closed its borders with France, Switzerland and Austria. Consequently, the coronavirus quantitative easing is happening in the most important countries around the World. Our latest revisions to estimates of the euro area growth are around -0.7% for 2020 (the European Commission estimates -1%). But, with the depth and duration of the impact of the epidemic, the estimates may deteriorate further.
FED, quantitative easing and coronavirus
Yesterday, the US Fed decided to take a similar steps. Lowering rates by 100 bps to 0-0.25%, and launching a quantitative easing policy totalling USD 700 billion. Despite this, futures on the US stock market are still profoundly negative (in the morning, less than 5%). At the moment, the markets will will only care about one main thing. About how quickly the quarantine measures will take up, and the daily increments of new cases will begin to decline. This will take at least two weeks.
As the South Korea case shows, in principle, the quarantine measures must remain in force. There is great uncertainty about how affected are the sectors of transport, hospitality, advertising, and real estate. Also, about whether we will feel a permanent shifting of contagion to the financial sector, or not.
Panic hits US citizens in the context of the spread of coronavirus. For example, Amazon is struggling with a shortage of supplies. It has forced the Fed not to wait for a regular meeting by Wednesday. It also has already faced extreme measures on Sunday. Official interest rates dropped to zero (to 0-0.25%), and the central bank is starting massive bond purchases. These should include US government bonds (up to USD 500 billion). Also, the mortgage bonds purchased during the financial crisis (up to USD 200 billion).
Eurodollar and Coronavirus quantitative easing
Of course, the Eurodollar reacted positively to the Fed’s massive monetary expansion, but the gains were not yet significant. The alpha and omega is how the countries are dealing the coronavirus, and at what stage in the development of the spread of the epidemic.
At the moment, the euro area (Italy, Spain and France) is clearly in the epicentre of the global contagion and, until the drastic quarantine measures take effect, the euro has no chance of strengthening. On the other hand, the US is only a few days or maybe a week behind Europe in the epidemic phase, and the worst is obviously (unless a miracle happens) yet to come. The ensuing impact of quarantine measures on the more service-dependent US economy will be much more vigorous, so US policymakers may have to do even more than the Fed last night. Therefore, the outlook for the Eurodollar is positive, given the evaporating interest rate differential. As the infection of Coronavirus will rise, we expect bigger amount of money for quantitative easing.
Despite further extreme measures on the part of the US Fed (lowering official rates to zero and buying government bonds up to $500 billion), Brent oil is losing again, and its price drops to $32 a barrel. Only the marginal impact of the US government’s announcement on Friday is intended to help US shale oil miners and start buying their oil into strategic reserves.
However, the problem with this strategy is that the maximum possible purchases (in terms of storage capacity) are approximately 80 million barrels. In other words, it represents a contribution to the global demand of 450,000 barrels per day during the next six months. This compared to a coronavirus weakening of millions of barrels per day, it just a drop in the sea that will not stop another oil price drop below $30 a barrel.