Brexit concerns faded into the background this week as the market focused on the coronavirus pandemic.
At the beginning of the week, UK equities opened around 9% below Friday’s closing levels, putting pressure on sterling. The emergency rate cut from the Bank of England midweek had an immediate effect, pushing the pound lower before it made tentative gains ahead of the budget announcement. The rate cut from 0.75% to 0.25% was accompanied by the introduction of “a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves”.
Later the same day, the Chancellor announced a package of measures to address the threat of the coronavirus, alongside historic levels of public investment. The news took the pound higher, briefly, although the optimism was short-lived as the market considered the scale of borrowing required for the promised programmes and fears over the impact of the coronavirus put pressure on the stock market. While both the rate cut and the budgetary measures were considered supportive to the pound, ultimately they were considered no match against a situation on the scale of the current pandemic. While other countries have implemented lock-down measures to prevent the spread of the virus, the UK has not followed suit, opting instead for a largely “business as usual” approach which has the intention of delaying the spread rather than preventing it entirely. While all currencies are struggling due to market volatility, the UK’s divergence from the global approach is putting the pound under additional scrutiny, and only time will tell if the current strategy will pay off for the country or for sterling.
In Europe, the divergence from global strategies to address the coronavirus has been of a different kind, and the euro has paid the price. While Italy, amongst the worst-hit countries, is in lock-down, the ECB chose not to cut rates towards the end of the week which has put the euro in a precarious position. News from the US earlier in the week that a travel ban had been implemented for the Schengen area did more harm to the US dollar than the euro, but Christine LaGarde’s refusal to follow other central banks and cut rates pushed the central currency lower.
While the move has come in for some criticism, the reality is that the ECB has less scope to cut rates than other central banks and opted instead to call on governments to implement fiscal measures alongside the ECB’s strategy to conduct a new kind of targeted longer-term refinancing operation (TLTRO) aimed at banks lending to small- and medium-sized businesses (SMEs). Earlier in the week, the Sentix Index of Euroland investor confidence came in at -17.1, close to a seven-year low and the ECB did nothing to inspire a rise in confidence. Fears arose of a repeat of the 2012 eurozone debt crisis after the ECB’s statement; the interest rate on 10-year Italian bonds jumped from 1.3% to 1.8%, the FTSE 100 fell more than 60 points, the German Dax index dropped 12.2% and the Madrid Ibex also fell 14.0%. As the situation continues to evolve, the market may continue to be volatile and the euro under pressure.
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