Portfolio Contagion’s Immature Immune Response

The physical coronavirus’ global explosion was matched in market results and fund flows with the initial blow, with currency, debt and equity indices down double digits, and combined two-month January-March outflows over $40 billion, double the 2008 financial crisis total according to the IIF headline tally. Public and private sector economists scrambled to revise already sober GDP growth forecasts to consensus recession, as the UN postulated a “doomsday $2 trillion hit” for a barely positive 2020 finish. China as the outbreak source was the first to report the scale of simultaneous demand and supply destruction, with fixed asset investment and retail sales both off 20%. S&P Ratings expected further “downside risks,” and the IMF Managing Director Georgieva after an original 3% projection could not define the “far fall.” The parallel oil price collapse with Russia and Saudi Arabia refusing output cooperation was another wrench, with a one-day 30% drop to $25/barrel the biggest in three decades. Big importers in Asia and elsewhere would typically benefit from the move especially if it tips the current account balance, but the likely Covid-19 fallout will negate these effects. The IMF and World Bank jumped into the breach, with respective $50 billion and $15 billion pledges for the disease emergency. Iran, with the largest caseload in the Middle East, asked the Fund for $5 billion for the first time since the 1960s. The US has not relaxed its comprehensive sanctions which exempt humanitarian operations, and it or another country could also block help due to internationally-certified noncompliance with anti-money laundering and terror financing rules. Venezuela was another unusual case seeking to tap the special rapid facility, but the request was rejected on the Maduro government’s non-recognition.

In advanced economies the big guns mobilized unprecedented rate-cutting and bond-buying programs. The Federal Reserve in a rare inter-meeting action slashed the benchmark to near zero and rolled out massive Treasury and other instrument backing. New ECB chief Lagarde after first demurring unveiled a euro 750 billion Pandemic bond purchase expansion, and the Bank of Japan deepened forays into corporate as well as government offerings. Washington extended swap lines with Canada, the UK, and Switzerland as well as into select emerging markets like Korea. China reduced bank reserve requirements twice, and Brazil, Indonesia and Turkey cut rates and intervened in currencies for “smoothing” purposes. Asia as the regional epicenter introduced large fiscal stimulus packages beyond China/Hong Kong. Indonesia offered $10 billion in manufacturing tax breaks and small business loans. Brazil chipped in with $30 billion repurposed from the existing budget, despite President Bolsonaro’s flagrant repudiation of recommended social distancing as he organized political rallies. In Europe Poland and Turkey deferred pension charges and expanded health and infrastructure spending, as the EU created a $35 billion pool and vowed more convergence criteria flexibility due to the catastrophe.  This largesse in turn could accelerate exchange rate depreciation against the dollar, with 20% drops for oil exporters in particular, including Mexico and Russia, Mexican President AMLO has also been widely criticized as a virus doubter as he insists on close embraces with government officials and supporters, while Pemex and the sovereign struggle to stave off ratings downgrade spread.

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