Mortgage Bond Sales Flood Market

The financial crisis is now in full swing, and credit markets are at the epicentre of current events, as owners of mortgage bonds and other asset-backed securities try to sell billions of dollars in assets, amid reports that there are significant investor withdrawals from these funds.

Bloomberg reported that Funds who buy up bonds of all kinds — from debt of America’s largest corporations to securities backed by mortgages — have struggled with record investor withdrawals amid choppy trading conditions in fixed-income markets. The rush to unload mortgage-backed securities signals that a credit meltdown that began with corporate bonds is spreading to other corners of the market.

Further Federal Reserve support, and other Central bank support is being sought. Raises the question, who should be supporting who, and should financial speculators really be bailed out?

Amid the selling, the Structured Finance Association, an industry group for the asset-backed securities market, asked government leaders on Sunday to step in and help boost liquidity in the market.

In a letter to U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell, the industry group said that “the future path of the pandemic has significantly disrupted the normal functioning of credit markets.”

The group asked them to “immediately enact a new version of the Term Asset-Backed Securities Loan Facility,” a financial crisis-era program that helped support the issuance of securities backed by consumer and small-business loans. Such a measure, the group said, would help enhance the liquidity and functioning of crucial credit markets.

“The overwhelming supply of securities for sale to meet redemptions has put significant downward pressure on almost all segments of the bond market,” Szilagyi said in the statement.

The sales included at least $1.25 billion of securities being listed by the AlphaCentric Income Opportunities Fund. It sought buyers for a swath of bonds backed primarily by private-label mortgages as it sought to raise cash, said the people, who asked not to be identified discussing the private offerings.

“The coronavirus has resulted in severe market dislocations and liquidity issues for most segments of the bond market,” AlphaCentric’s Jerry Szilagyi said in an emailed statement on Sunday. “The Fund is not immune to these dislocations” and “like many other funds, is moving expeditiously to address the unprecedented market conditions.”

The best way to obtain favorable prices is to offer a wider range of securities for bid he said, declining to discuss the amount of securities the fund put up for sale.

The AlphaCentric fund plunged 17% on Friday, bringing its total decline for the week to 31%.

“We can most likely expect a continuation of price volatility across the bond market spectrum until the panic selling and market uncertainty subsides or government agencies intervene to support the broader fixed-income market,” Szilagyi said

Fed Supports Liquidity Of US State and Municipal Money Markets

The Federal Reserve Board on Friday expanded its program of support for the flow of credit to the economy by taking steps to enhance the liquidity and functioning of crucial state and municipal money markets. Through the Money Market Mutual Fund Liquidity Facility, or MMLF, the Federal Reserve Bank of Boston will now be able to make loans available to eligible financial institutions secured by certain high-quality assets purchased from single state and other tax-exempt municipal money market mutual funds.

All U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks are eligible to borrow under the Facility.

Collateral that is eligible for pledge under the Facility must be one of the following types:

  1. U.S. Treasuries & Fully Guaranteed Agencies;
  2. Securities issued by U.S. Government Sponsored Entities;
  3. Asset-backed commercial paper that is issued by a U.S. issuer, is rated at the time purchased from the Fund or pledged to the Reserve Bank not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, is rated within the top rating category by that agency;
  4. Unsecured commercial paper that is issued by a U.S. issuer, is rated at the time purchased from the Fund or pledged to the Reserve Bank not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, is rated within the top rating category by that agency; or
  5. U.S. municipal short-term debt that: i.Has a maturity that does not exceed 12 months; and ii.At the time purchased from the Fund or pledged to the Reserve Bank: 1.If rated in the short-term rating category, is rated in the top short-term rating category (e.g.,rated SP1, MIG1, or F1, as applicable) by at least two major rating agencies or if rated by only one major rating agency, is rated within the top rating category by that agency; or 2.If not rated in the short-term rating category, is rated in the top long-term rating category (e.g., AA or above) by at least two major rating agencies or if rated by only one major rating agency, is rated within the top rating category by that agency.
  6. In addition, the facility may accept receivables from certain repurchase agreements. The facility at this time will not take variable rate demand notes or tender option bonds, but the feasibility of adding these and other asset classes to the facility will be considered in the future.Rate: Advances made under the Facility that are secured by U.S. Treasuries & Fully Guaranteed Agencies or Securities issued by U.S. Government Sponsored Entities will be made at a rate equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made.

Advances made under the Facility that are secured by U.S. municipal short-term debt will be made at a rate equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made plus 25 bps.

Fed Extends USD Swap Lines To Nine Additional Countries

The US Federal Reserve has opened the taps for central banks in nine additional countries to access dollars in response to the current unstable financial system.

US Dollars have been in huge demand – and tight supply – in markets outside US borders as banks, companies and governments scramble to secure them to service the dollar-denominated debts many have accumulated. That has sent dollar-funding costs spiraling and has led to a historic run-up in the dollar’s value against other currencies.

The new facilities total $60 billion for central banks in Australia, Brazil, South Korea, Mexico, Singapore, and Sweden, and $30 billion each for Denmark, Norway, and New Zealand. The swap lines will be in place for at least six months.

This is a combined total of $US450 billion, money to ensure the world’s dollar-dependent financial system continues to function.

Those countries were given swap lines during the 2007 to 2009 crisis, and the Fed has permanent swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.

The Fed said the new swap lines “like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global US dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad”.

US dollar credit to non-bank borrowers outside the United States grew by 4 per cent year-on-year at end-June 2019 to reach $US11.9 trillion, according to the BIS.

This helps to underscore the status of the US dollar as a reserve currency.

Making dollars available to foreign nations — even if it didn’t cost the Fed — became a point of contention for some in the U.S. Congress, says Bloomberg.

The central bank had to repeatedly defend the action and explain to lawmakers that U.S. taxpayers were not lending foreign nations money and that because these were swaps — not loans — there was no risk of default.

Fed Cuts To Zero, As Part Of Global Coordinated Action

The Fed has just cut rates to 0- 1/4 percent.

In addition the Federal Reserve on Sunday announced it would purchases $700 billion in bonds and securities to stabilize financial markets and support the economy.

The emergency rate cut and push to flood the Treasury bond market with liquidity comes as the coronavirus pandemic forces businesses across the U.S. and world to shutter, likely plunging the global economy into a recession.

This is part of a coordinated global response, the Fed says.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.

These central banks have agreed to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points. To increase the swap lines’ effectiveness in providing term liquidity, the foreign central banks with regular U.S. dollar liquidity operations have also agreed to begin offering U.S. dollars weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered. These changes will take effect with the next scheduled operations during the week of March 16.1 The new pricing and maturity offerings will remain in place as long as appropriate to support the smooth functioning of U.S. dollar funding markets.

The swap lines are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad.

The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Randal K. Quarles. Voting against this action was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting.

In a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks—the U.S. dollar liquidity swap line arrangements. More information can be found on the Federal Reserve Board’s website.

Markets Crash And Fed’s $1.5 Trillion Repo Purchases Escalate Dramatically

The Dow plunged to its biggest-one day percentage loss since October 1987 as fears the spread of the novel coronavirus will pick up pace and usher in a global recession overshadowed the Federal Reserve’s bold new stimulus measures to calm funding markets.

The Dow Jones Industrial Average fell nearly 10%, or 2,352 points, it worst one-day percentage drop since Black Monday when it lost 22.6%. It was the fourth-largest percentage drop for the blue chip index in history, rivaling those seen in 1929.

The S&P 500 plunged 9.5% and the Nasdaq Composite slumped 9.4%.

The rout on Wall Street for the second-straight day comes as investors upped their bearish bets on stocks despite the Federal Reserve unveiling $1.5 trillion in fresh liquidity to combat “temporary disruptions” in funding markets.

The short-term pause in selling following the Fed announcement proved short-lived as investor sentiment on stocks continued to be swayed by the latest updates on the spread of Covid-19, which has killed nearly 5,000 people, with infections topping 133,000 worldwide.

In the U.S., where infections are feared to increase in the coming weeks, state-wide bans on large gatherings to limit the virus impact continued, with New York announcing announce a ban on gatherings of 500 or more people.

The Fed’s announcement was unprecedented:

The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released a new monthly schedule of Treasury securities operations and has updated the current monthly schedule of repurchase agreement (repo) operations.  Pursuant to instruction from the Chair in consultation with the FOMC, adjustments have been made to these schedules to address temporary disruptions in Treasury financing markets.  The Treasury securities operation schedule includes a change in the maturity composition of purchases to support functioning in the market for U.S. Treasury securities.  Term repo operations in large size have been added to enhance functioning of secured U.S. dollar funding markets.

  • As a part of its $60 billion reserve management purchases for the monthly period beginning March 13, 2020 and continuing through April 13, 2020, the Desk will conduct purchases across a range of maturities to roughly match the maturity composition of Treasury securities outstanding.  Specifically, the Desk plans to distribute reserve management purchases across eleven sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes. The distribution of purchases across sectors will be the same distribution as the Desk uses to reinvest principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in Treasury securities.  The first such purchases will begin tomorrow, March 13, 2020.
  • Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020.  Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement.  Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule.  The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.

These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak. Reserve management purchases into the second quarter will continue to be conducted with this maturity allocation. The terms of operations will be adjusted as needed to foster smooth Treasury market functioning and efficient and effective policy implementation.

Detailed information on the schedule of Treasury purchases is provided on the Treasury Securities Operational Details page. Detailed information on the schedule and parameters of term and overnight repo operations are provided on the Repurchase Agreement Operational Details page.

Fed Ups The Repo Ante

The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released the repurchase agreement (repo) operational schedule for the upcoming period.

Beginning Thursday, March 12, 2020 and continuing through Monday, April 13, 2020, the Desk will offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.  In addition, the Desk will also offer three one-month term repo operations, with the first operation occurring on Thursday, March 12, 2020.  The amount offered for each of these three operations will be at least $50 billion.

Consistent with the FOMC directive to the Desk, these operations are intended to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures that could adversely affect policy implementation.  They should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus.  The Desk will continue to adjust repo operations as needed to foster efficient and effective policy implementation consistent with the FOMC directive.

Detailed information on the schedule and parameters of term and overnight repo operations are provided on the Repurchase Agreement Operational Details page.

We are headed to $800 billion extra liquidity, which clearly is more than a temporary problem in the banking system. John Adams and I discussed this in a recent post.

Fed’s final stress capital buffer is credit negative for US banks

On 4 March, the Federal Reserve Board (Fed) finalized changes to its capital rules for US banks with assets greater than $100 billion. Via Moody’s.

The final changes increase the flexibility banks have to payout capital more aggressively and will likely give bank management greater leeway to reduce the size of their management buffers and operate with capital ratios closer to the minimum levels required.

The final version establishes a stress capital buffer (SCB) that incorporates the Fed’s stress test results into its regulatory Pillar 1 capital requirements for these banks. Originally proposed in April 2018, the final rule includes a number of changes that weaken the original, making it credit negative for all US banks covered by the rule.

The Fed’s impact analysis of the final rule suggests that in aggregate the Common Equity Tier 1 (CET1) capital requirements at the affected US banks could decline up to $59 billion: $6 billion at the eight US global systemically important banks (G-SIBs) and $35 billion at the rest. Since most banks currently hold a management buffer above existing requirements, the affected banks could actually cut their CET1 capital by twice this amount and still comply with the final rule. The CET1 capital reduction could be $40 billion (a 5% decline) at the G-SIBs, $50 billion (a 21% decline) at other banks with $250 billion or more in assets, and $35 billion (a 16% decline) at
banks with assets between $100 and $250 billion.

Consistent with the proposal, the final rule integrates stress testing into the Fed’s regulatory capital requirements by replacing the capital conservation buffer, which is currently 2.5%, with the SCB. The SCB will be the higher of either 2.5%, or the difference between the starting and minimum projected CET1 capital ratio under the severely adverse scenario of the Fed’s Dodd-Frank Act Stress Test (DFAST) plus four quarters of planned common stock dividends.

Starting in October 2020, if a bank’s risk-based capital ratios fall below the aggregate of the minimum capital requirement plus the SCB, the relevant G-SIB surcharge, and the countercyclical capital buffer (if any), restrictions would apply to capital payouts and certain discretionary bonus payments.
As in the proposal, the final rule changes the current annual Comprehensive Capital Analysis and Review (CCAR) and DFAST process.

The final rule eliminates the assumption that a bank’s balance sheet and risk-weighted assets will grow under the stress scenarios, eliminates the Fed ability to object on quantitative grounds to a bank’s capital plan, and removes the 30% dividend payout ratio as a threshold for heightened scrutiny of a bank’s capital plan. Both the flat balance sheet assumption and the requirement that banks hold capital for only four quarters of dividends rather than for the full amount of planned payouts over the stress test horizon lower capital requirements versus the current stress testing regime.

The decrease is only partially offset for G-SIBs by the first-time inclusion of the G-SIB surcharge within the Fed’s stress test.

The final rule is weaker than the original proposal for several reasons. Under the proposal, banks would not have been allowed to pay out capital in excess of their approved capital plans without Fed prior approval. In the final rule, banks can in most cases make payouts in excess of amounts in their capital plan, provided the payout is otherwise consistent with the payout limitations in the final rule.

Additionally, the final rule modifies payout limitations to allow firms with an SCB in excess of 2.5% to pay a greater portion of their dividends and management bonuses and to repurchase shares for a period of time after capital ratios fall below the requirement. And in the final rule, the SCB, unlike the DFAST capital requirements, will not incorporate material business plan changes, such as those resulting from a merger or acquisition. As a result, such actions will only affect a bank’s capital ratio once the action has occurred.

The final rule also excludes the originally proposed stress leverage buffer requirement, which would not have been a binding constraint for most banks. Its elimination from the final rule removes this requirement as a potential backstop. And without the stress leverage buffer, the still pending proposal to modify the supplementary leverage ratio for the eight G-SIBs by tying it more closely to the G-SIB surcharge could further weaken the ability of the leverage ratio to serve as a backstop requirement and would also be credit negative.

Federal Reserve Board Approves Simplified Capital Rules for Large Banks

The US Federal Reserve Board on Wednesday approved a rule to simplify its capital rules for large banks, preserving the strong capital requirements already in place.

The “stress capital buffer,” or SCB, integrates the Board’s stress test results with its non-stress capital requirements. As a result, required capital levels for each firm would more closely match its risk profile and likely losses as measured via the Board’s stress tests. The rule is broadly similar to the proposal from April 2018, with a few changes in response to comments.

“The stress capital buffer materially simplifies the post-crisis capital framework for banks, while maintaining the strong capital requirements that are the hallmark of the framework,” Vice Chair for Supervision Randal K. Quarles said.

The SCB uses the results from the Board’s supervisory stress tests, which are one component of the annual Comprehensive Capital Analysis and Review (CCAR), to help determine each firm’s capital requirements for the coming year. By combining the Board’s stress tests—which project the capital needs of each firm under adverse economic conditions—with the Board’s non-stress capital requirements, large banks will now be subject to a single, forward-looking, and risk-sensitive capital framework. The simplification would result in banks needing to meet eight capital requirements, instead of the current 13.

The SCB framework preserves the strong capital requirements established after the financial crisis. In particular, the changes would increase capital requirements for the largest and most complex banks and decrease requirements for less complex banks. Based on stress test data from 2013 to 2019, common equity tier 1 capital requirements would increase by $11 billion in aggregate, a 1 percent increase from current capital requirements. A firm’s SCB will vary in size throughout the economic cycle depending on several factors, including the firm’s risks.

To reduce the incentive for firms to take on risk and further simplify the framework, the final rule does not include a stress leverage buffer as proposed. All banks would continue to be subject to ongoing, non-stress leverage requirements.

Large banks have substantially increased their capital since the first round of stress tests in 2009. The common equity capital ratio of the banks in the 2019 CCAR has more than doubled from 4.9 percent in the first quarter of 2009 to 12.2 percent in the fourth quarter of 2019, with total capital doubling to more than $1 trillion.

Also on Wednesday, the Board released the instructions for the 2020 CCAR cycle. The instructions confirm that 34 banks will participate in this year’s test. CCAR consists of both the stress tests that assess firms’ capital needs under stress and, for the largest and most complex banks, a qualitative evaluation of the practices these firms use to determine their capital needs in normal times and under stress. Results will be released by June 30.

Rate Cuts Don’t Cure Viruses

As expected the RBA cut the cash rate to 0.5% “the Board took this decision to support the economy as it responds to the global coronavirus outbreak”.

All the major banks passed on the cut in full (thanks to severe political pressure), though gritted teeth. The profit pressure at the banks just went up a notch, on our modelling, a potential fall of more than 3%, though for some regionals perhaps double that. Players like Suncorp also passed on the cut.

The Government has said there will be a targetted package to assist businesses soon, and before the May budget. The savings deeming rate is now completely out of wack with even the very best deposit rates available, so pensioners, those on Government support and welfare are being hit by the gap. The deeming rate for singles is currently 3.0% for assets over $51,200 and 1.0% for those under that threshold. One way the Government is “balancing” the budget

Overnight the FED cut, in an expected “unexpected” drop of 50 basis points. This was the first time the Fed had cut by more than 25 basis points since 2008 and the reduction marks a stark shift for Powell and his colleagues. They had previously projected no change in rates during 2020, remaining on the sidelines during the election year, after lowering their benchmark three times in 2019. They of course rejected any political influence despite Trump’s consistent pressure to drop rates.

Its become very clear that central bankers are worried not only about the economic impact of COVID-19 but also the losses in the stock market.

The Fed said the coronavirus outbreak had disrupted economies in many countries and these measures will weigh on activity for some time. The magnitude and persistence of the impact is uncertain but the risks to their outlook changed enough to justify a move to support the economy. He added that there will be more action by each G7 nation along with the possibility of formal coordination. In other words, more easing is on the way from other central banks including the Fed if the sell-off in stocks deepens and the global slowdown worsens. This was aimed to restore confidence in the market, it did not.

The OECD indicated that economic growth could fall to as low as 1.5% for this year. The Fed’s decision could trigger a wave of easing from other central banks around the world although those in the euro-area and Japan have less scope to follow with rates already in negative territory.

The G7’s issued a statement that was to the point:

We, G7 Finance Ministers and Central Bank Governors, are closely monitoring the spread of the coronavirus disease 2019 (COVID-19) and its impact on markets and economic conditions.

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.  G7 central banks will continue to fulfill their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system.

We welcome that the International Monetary Fund, the World Bank, and other international financial institutions stand ready to help member countries address the human tragedy and economic challenge posed by COVID-19 through the use of their available instruments to the fullest extent possible.

But the point is, no rate cut, or government stimulus can cure the virus, which continues to spread with person to person transmission on the rise.

The latest WHO update says eight new Member States (Andorra, Jordan, Latvia, Morocco, Portugal, Saudi Arabia, Senegal, and Tunisia) reported cases of COVID-19 in the past 24 hours. Globally 90,870 cases have been confirmed (1,922 new), with China 80,304 confirmed (130 new) and 2,946 deaths (31 new). Outside of China 10,566 cases are confirmed (1,792 new) in 72 countries (8 new) with 166 deaths (38 new).

The flow on effects in terms of reduced commerce is significant, with more businesses unable to source raw materials or distribute good. Across transport and tourism, and education the impacts are immediate, but other sectors are following. Hence the expectation of slowing growth.

The question becomes, at what point do businesses cease to trade, or pay their employees, and to what extent will households also hunker down (many were already).

The US markets reacted badly to the FED’s move, with the Dow down close to 3%.

The ASX was also down in early trading.

The supply side consequences of the virus, could well flow on the credit markets, and in this case lower interest rates – other than as a confidence signal will not help.

Central bank tools are not going to cure the virus, and lower rates and more QE liquidity might well make the situation worse. Fiscal responses can provide a little more support, perhaps, though Governments seem reluctant to play that card hard.

We are in uncharted territory, and I do not think Central Banks can save us this time.

Statement from Federal Reserve

Jerome Powell just issued this “don’t panic” message.

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.

The calls from the markets for central bank intervention and fiscal stimulus are rising fast. However, this could well be finger in the dyke stuff….