July 25, 2024

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What Strategists Say About the ECB and Central Bank Stimulus

(Bloomberg) — The calls for monetary and fiscal stimulus amid the coronavirus crisis have been loud and clear — and they’re increasingly being answered, at least to an extent.

The latest measures include an $820 billion emergency bond-buying program from the European Central Bank and a virus-relief bill in the U.S., with a potential $1.3 trillion package following behind.

While seen as a positive start, many investors still believe stimulus packages to date are not enough to offset the economic impact of the outbreak — and want more. Some emphasize the importance of speed over efficiency, while others suggest the measures could mark the end of the current period of market volatility.

Here are the views of a number of market participants:

Feels Inadequate

Jim Vogel, FHN Financial:

“Bottom line: Stimulus with any number of zeroes at the end feels inadequate this week. The balance could change in roughly two weeks, if all goes well.”

“For the rest of this week, it appears the coronavirus story has lost the ability to surprise. In its place comes the mounting wave of layoff announcements.”

Quick vs Efficient

Steve Englander, head of G-10 FX research at Standard Chartered:

“It will be difficult for policy to prevent a major downturn in coming months, but policy can prevent a temporary disease shock from becoming a more extended and aggravated downturn.”

“Maintaining orderly markets and solvency is more important than trying to maintain demand in the short term. Given the nature of the shock, a quick policy response may be more important than a perfectly efficient one so as to prevent otherwise solvent firms from shutting down and unnecessarily delaying recovery.”

Causing Confusion

Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities:

“Surprises or unexpected bazooka-type moves that accompany side-effects upset main scenarios for market players and force them to readjust and alter various outlooks and investment policies.”

“Actions coming out of the blue cause confusion and in the end, prompt market players to just choose liquidation.”

Selling Exhaustion

Julian Emanuel, chief equity and derivatives strategist at Btig LLC:

“Could stocks’ relentless downtrend pause, particularly now that the Senate has begun to move and the ECB along with it? The volatility of volatility index, VVIX, did not make a higher high Wednesday despite the new high in VIX and new low in SPX, indicating the potential for near-term selling exhaustion.“The Fed (and soon, the Treasury, after Congress’s mandate) is using all its tools to make sure that, unlike 2008, the Public Health Crisis and the Economic Crisis does not morph into a financial crisis. Success means growth returns in the second half of 2020.”

Good Start

Sue Trinh, senior macro strategist at Manulife Asset Management Ltd:

“It’s a good start and a step in the right direction with the tools that they have available, but they can still do more.”

“There’s much more need for U.S. dollar liquidity to get to where it’s needed the most,” she said. “At the moment the markets are screaming it’s not enough — we need to see more of that.”

No Fundamental Support

Kay Van-Petersen at Saxo Capital Markets Pte:

“What’s very clear is that positions continue to be liquidated, and we can’t start the unwind just because of good news hitting the tape. You can’t see the fundamentals in this kind of environment. The psychology is so poor and until that improves, any data point is going to be interpreted negatively.”

Future Bubbles

Osamu Takashima, chief FX strategist at Citigroup Global Markets Japan Inc.:

“What authorities are doing around the world seems to be going a bit too far. While their fiscal, monetary and other comprehensive measures will have a significantly positive impact in the near-term, there are risks over the longer term.”

“What they are doing is creating a potential source of future asset bubbles, and exposing them to the challenge of how to deal with it when such bubble bursts. Also, monetary policy is forced to its limits and what that would mean over the longer term.”

“It’s not a financial systemic crisis, so once investors and asset managers complete their position adjustments, market recovery can be expected.”

Long Way to Go

Tim Graf, Head of Macro Strategy for EMEA at State Street Global Markets

“Much as Spring 2009 was a seminal moment in the financial crisis, when governments began to pick up the baton from central banks, we are nearing the time when market volatility should begin to subside. There is still a long way to go — our price-based measures of risk still suggest a very fragile market environment and our real-time gauges of inflation speak to a demand side shock underway that could last months.”

Support Base

Paul Sandhu, head of multi-asset quant solutions and client advisory for Asia Pacific at BNP Paribas Asset Management in Hong Kong:

”Eyes have been on the U.S. policymakers and their ability to contain the virus. The first step toward market stabilization is for the global market to know that adequate steps are being taken in the U.S. and Europe to contain the virus. Until that time, policy-maker actions will have limited success.”

“However in the back end, the current and next set of stimulus packages do create a support base in the economy while containment measures are advanced.”

Recession Unavoidable

Julian Wee, investment strategist at Credit Suisse Group AG in Singapore:

“The jury is still out on whether the aggressive policy easing thus far will help stabilize financial markets. Policy easing clearly cannot prevent short-term recession, but should provide strong lift after. A brief recession of some three months (similar to China’s) looks unavoidable in Europe, the USA and elsewhere, mainly due to the substantial lockdown measures being implemented.”

“In the near term, the Fed’s efforts to ease the funding stress need some time to properly impact markets. However, these efforts might also need to be expanded in the coming days or weeks.

“The question now is whether markets will ‘see through’ the downturn and not go into further panic over negative headlines – the coming three to five weeks will be very challenging in this regard. Though we believe that further downside risks in equities are more limited than what we have seen so far, we remain neutral on equities for now. The time to substantially re-enter the market has yet to come.”

Seeking Normalcy

Citigroup Inc. economists led by Catherine Mann:

“The markets are uncertain about the evolution of earnings, inflation, cross-sectoral exposure, and cross-economy exposure of the assets. How long will it take to get back to normal, or will there be a ‘new normal’ These uncertain real fundamentals affect the relative price dynamics across asset classes and positions that exacerbate overshooting and volatility.”

“Policy efforts that support consumer confidence and business through the health crisis is crucial to prevent a cascade of business bankruptcies, layoffs, and consumer scarring which will lengthen the time it takes to return to normalcy.”

$26 Trillion

Hamish Douglass, chairman and chief investment officer of Magellan Financial Group Ltd.

“We are unable to assess the most likely outcome at this stage, as we don’t have visibility on the scale and effectiveness of the possible fiscal and monetary responses that governments and central banks might enact,” Douglass said. “The fiscal response required to head off the worst outcomes is unprecedented and potentially could be up to 20% to 30% of GDP.”

Many countries, especially those in emerging markets, may be unable to respond with “sufficient force,” Douglass wrote. But major countries including the U.S., China, Japan and Germany are in strong positions to respond, he said.

Violent Reversal?

Mark Haefele, chief investment officer at UBS Global Wealth Management:

“Investors could require more monetary policy actions before they are willing to buy stocks with any conviction. With such massive stimulus in place, and likely more to come, the upward turn in markets, when it comes, could be violent. Yet predicting when that turn will occur is impossible.”

(Updates with quotes in Violent Reversal and No Fundamental Support sections)

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