As governments on both sides of the Atlantic announced economic stimulus plans unprecedented in scope, the FTSE 100 yesterday turned around an intraday loss of another 3% to close 2.8%, or 143.82 points, up.
Wall Street’s major indices fared even better later in the day as the S&P 500 was driven up 6%, the Dow Jones Industrial Average 5.2% and the Nasdaq 6.2%. In mainland Europe the German and French benchmark indices, the DAX 30 and CAC 40, gained 2.3% and 2.8% respectively.
The reverse offered a moment of respite for battered markets, which on Monday had suffered their worst day since the original Black Monday back in 1987.
In the UK, chancellor Rishi Sunak laid out details of a package designed to keep the economy afloat, anchored by a commitment to £330 billion of government-backed loans for British businesses worst affected by the Covid-19 lockdown.
Over in the USA, the Federal Reserve opened a commercial paper funding facility designed to maintain the flow of credit to households. The last time the step was taking was during the financial crisis. President Trump has also promised to ‘airdrop’, $1000 dollars to what could be a majority of households, on a means tested basis. It’s expected to cost over a trillion, with cheques arriving in the post within 2 weeks.
The London Stock Market’s rebound took root before Mr Sunak had announced the UK government’s stimulus plans. The statement wasn’t made until after the close of trading but the speculation around the extent of what would be announced was enough to reignite a degree of optimism.
The chancellor’s stimulus package came against the backdrop of warnings that the UK economy could take an historical hit over the next couple of quarters as whole sectors effectively pull down the shutters for an extended period of time. Paul Dales, chief UK economist at Capital Economics is reported in The Times as forecasting a 15% contraction of the economy over the second quarter.
To put that into context, during the 2008-09 financial crisis, the UK economy contracted by 6% over five quarters:
“The hit this time will be felt sooner as businesses and households significantly alter their behaviour almost overnight.”
He cautioned it could take until late next year for a full recovery.
David Owen and Marchel Alexandrovich of investment bank Jefferies International have analysed every recession as far back as the 1800s, as well as the economic effects of pandemics, in an attempt to model how the coming recession might be expected to look. Their analysis covered the UK and Eurozone, where the economies are expected to follow a similar trajectory.
Their conclusion is that the most likely scenario is a ‘V-shaped’ recession. That will involve an extremely deep economic blow but one that is relatively short lived. The pair believe that the coming quarter, when a lot of economic activity will come to a complete halt, will bear the brunt of the impact. A fall in gross domestic product of up to 8.7% is thought likely.
A survey of fund managers conducted by the Bank of America also showed expectations for the sharpest monthly fall in global growth expectations that has been registered in its 26-year history. The survey also showed a leap in the cash allocations held by funds and a record drop in equities allocation.
For now, the London Stock Exchange and Wall Street expect trading to continue through the crisis, despite the Philippines becoming the first country to halt equity, bond and currency trading. The London Stock Exchange stated it “continues to operate as normal and there are no plans to suspend trading.”