Markets: investors have started to work out just how bad this crisis could be

If fear is the new greed, then world stock markets are locked into a Hammer House of Horror movie from which they see no escape and don’t quite know where the exit should or could be.

Even an emergency cut in interest of 50 points by the Fed shortly after the US markets opened today failed to stop financial markets from taking a dive.

As the time of writing, all the main US indices – the Dow Jones, the Nasdaq and the S&P – were trading lower despite the swift decision by Fed chairman, Jay Powell, to trim rates to 1%.

US 1O year Treasury bonds are now yielding less than 1 per cent.

By contrast, the FTSE 100 index recovered a little and closed up 2% while the more UK-based company index, the FTMC, rose by 2.4%.

While the Fed’s aim was to bring calm back to stock markets after the biggest fall last week since the financial crash, the cut appears to have had the opposite effect.

In its statement following the cut, the Fed said: “The coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.” ( It was also made plain that President Trump had nothing to do with the Fed’s decision to move so dramatically.)

The Fed’s move came after an emergency telephone call between G7’s finance ministers who have announced that they will use “all appropriate policy tools” and “fiscal measures” to tackle the economic impact of coronavirus.

Led by US Treasury Secretary, Steve Munchin, and Powell, the central bankers and finance ministers agreed that: ”Given the potential impacts of Covid-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”

“Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase.

That finance ministers got together so quickly also demonstrates just how nervous governments are about the economic fallout from the virus outbreak. The call follows on from the stark warning on Monday from the OECD group which predicted that if the virus is not contained then world growth could be halved to 1.5% this year.

The departing Bank of England Governor, Mark Carney, added his fears to the fire, saying the virus scare could have a severe hit on economic activity in the UK but of a “temporary” nature.

Like his fellow central bankers, Carney has indicated that the bank will take what measures are needed to ensure liquidity to maintain financial stability.

Yet the problem is that the financial markets are deeply sceptical about what precisely new policy initiatives it is that the central bank and governments can actually deliver. They have heard it all before: promises to maintain confidence and liquidity but with government bonds trading at negative yields in countries across the eurozone and in Japan, they don’t know what other armoury there is in the tank to use.

Indeed, money managers and investors are questioning just how effective even cheaper money can be in countering the impact of further outbreaks of the virus on the world economy.

This is no longer a question of stimulating demand, but an issue of supply and demand. If most of the world’s population are being advised to self-isolate and stay at home, and if big public events are being postponed, then it doesn’t matter how low interest rates are, people will not venture out to buy or spend on unnecessary items.

And, if at the same time, those factories and companies around the world which are making and supplying our goods are unable to send or make their goods, then we are faced with a state of paralysis.

Indeed, some economists reckon the Fed’s move could backfire. Marc Ostwald, chief economist at ADM Investor Services, argues that lower interest rates could create greater risks down the line. This, he claims, is because coronavirus is fundamentally a supply chain problem , so lower rates will simply drive asset prices higher. Ostwald says: “Remember that observation about extended periods of economic growth ‘not dying of old age’, but all too frequently of policy mistakes – sort this into that category.”

“Indeed following decade in which central bank has fuelled chronic asset price inflation, and sanctioned a shockingly high level of financial engineering, this may in the long run be judged by historians to be a ‘straw that broke the camel’s back’ type of error.”

He may be right. This time round, central banks promising cheaper money is not going to persuade the public to go out and buy that fancy Louis Vuitton handbag he or she has been eyeing up for years. They will have cancelled the cruise to the Baltic and be at home watching Location Location instead.

Nor will easy money help the factories in China making automotive parts for JLR’s factory in the West Midlands if the ships are not able to leave their ports.

This epidemic is different from others, mainly because of the unknown. And the unknown is what is creating the fear. As Franklin Roosevelt said in his inaugural speech on becoming presdient: “The only thing we have to fear is fear itself.”