“The UK government is prepared to throw the kitchen sink at the domestic economy”
JP Morgan Asset Management global market strategist Hugh Gimber said: “Today’s announcement highlights that the UK government is prepared to throw the kitchen sink at the domestic economy. The Bank of England has been working hard to keep government borrowing costs under control, with the launch of a substantial quantitative easing programme this week.
“It’s now clear that the Treasury plans to take full advantage. The financial support from the government to pay 80 per cent of workers’ wages whose jobs would otherwise be at risk is precisely the type of measure that is required to try to prevent the inevitable hit to economic activity from spiralling into a much deeper downturn. Its success will, in part, be dependent on the stimulus reaching those most in need in a sufficiently timely fashion.”
Chancellor announces “unprecedented” fiscal response to coronavirus
UK chancellor Rishi Sunak has unveiled an “unprecedented” range of measures to help individuals and businesses through the coronavirus crisis.
In today’s daily update on the coronavirus situation, Sunak announced the introduction of government-funded wage subsidies to ensure companies do not need to lay off staff while the country deals with the outbreak, among other measures.
These subsidies will cover up to 80 per cent of a worker’s salary up to £2,500 a month and are available to businesses regardless of size. There will be no limit to the funding provided for this.
Matthew Cady, investment strategist at Brooks Macdonald, said: “Rishi Sunak has today unveiled an unprecedented scale of fiscal response which offers a tipping point for financial markets which have been rocked by the fallout from the coronavirus outbreak. In doing so, the chancellor is providing a fast-acting buffer against a supply shock to the economy, just as the Bank of England has worked hard to mitigate the feedback loop into the demand side of the economy.
“Today’s steps by the chancellor go much further that what had already been announced. The earlier decision this week to provide £330bn of loans to businesses was not the lifeline that markets were looking for. Giving a loan to a business that will probably be unable to pay it back doesn’t create a permanent solution for either the economy or markets. Neither does this week’s cut in interest rates give the much-needed immediate respite. While easier monetary policy will turbocharge the recovery when it comes, it takes longer to work in the real economy, acting with a lag of between 18 and 24 months.
“What is needed from governments and politicians is a ‘right-now’ plan, and it’s good to see that the chancellor has finally recognised this with the measures he is taking today. For markets, the coronavirus outbreak will clearly drive a significant jolt to the UK economy over the next one or two quarters. But with UK policymakers now giving it both fiscal and monetary barrels, there are good chances that this stays a short-term impact. Today’s actions should start to give investors some encouragement to take advantage of the pullback in valuations as they think about their longer-term investment horizons.”
Performance of equity markets over 2020 so far
Source: FE Analytics
“A desperate measure for a desperate situation”: Investors on Bank of England’s rate cut and QE boost
FTSE and European markets rise on opening
European stock markets opened with strong gains this morning, bolstered by yesterday’s new monetary policy packages.
The FTSE 100 leapt 5 per cent while the German Dax went even higher at 6.65 per cent and the French CAC 40 up to 5.88 per cent. Italy and Spain are also ahead in early trading.
Yesterday saw the Bank of England cut interest rates down further to 0.1 per cent and added £200bn to its quantitative easing programme and the European Central bank announced a €750bn stimulus package, both to support markets through the coronavirus crisis.
James Hughes, chief market analyst at Scope Markets said: “The interest rate in the UK of 0.1 per cent is the lowest level in the UK for over 300 years and more stimulus could potentially be added today as the Chancellor of the Exchequer looks too help wages and those in work.
“The fact that we had seen gains on the back of these announcements yesterday and we are not looking to give up huge falls today shows that may be the moves by central banks to stabilise the markets are starting to have an effect. However, we cannot rule out a deterioration of the situation as the day goes on.”
“Cautious hopes of a relatively quick recovery are growing”
Fiona Cincotta, market analyst at Gain Capital, said: “Following on from the BoE’s second emergency cut on Thursday, which has brought interest rates to their lowest level in the Bank’s 325-year history, the UK chancellor is expected to unveil a vast rescue packages aimed at protecting workers’ jobs and wages as the coronavirus pandemic continues to hit businesses. This comes after the £330bn bailout blowout announced by Sunak.
“The US Senate was also debating a $1trn package that would include direct help for Americans and relief for small business; steps to stabilise the economy. China could also be set to release trillions of yuan in fiscal stimulus to revive the economy.
“The speed with which the central banks have brought in measures, and the depths that they have shown that they are willing to go to, to cushion the economic impact from coronavirus is easing fears. Cautious hopes of a relatively quick recovery are growing.”
Yesterday’s TN Live Blog
Bank of England slashes base rate to 0.1%