Mike Pyle, Global Chief Investment Strategist of BlackRock together with Elga Bartsch, Head of Macro Research, Scott Theil, Chief Fixed Income Strategist and Vivek Paul, Senior Portfolio Strategist all within the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Drastic market moves in recent weeks – triggered by fears of the coronavirus outbreak and its economic toll saw sharp equity selloffs and government bond yield declines.
One-month drift from equity benchmark in a 60/40 portfolio, 2006-2020
The coronavirus outbreak represents a major external shock to the macro outlook, akin to a large-scale natural disaster. Public health measures deployed to stop the virus’ spread are set to bring economic activity to a near standstill and cause a sharp contraction in economic growth in the second quarter. But we expect activity to ultimately return with limited permanent damage as long as authorities deliver an overwhelming fiscal and monetary policy response to bridge businesses and households through the shock.
The required policy response includes drastic public health measures to stem the outbreak – and a decisive, pre-emptive and coordinated policy response to stabilize economic conditions and financial markets. All this is starting to take shape. Central banks have cut rates and adopted measures to ensure markets keep functioning. The key here is to alleviate any dysfunction of market pricing and tightening of financial conditions. What is needed are overwhelming and coordinated policies – both on monetary and fiscal fronts – that forestall any cashflow crunches, especially among small businesses and households, that could lead to financial stresses and tip the economy into a crisis. The UK, Canada and Australia have served as models of policy coordination. We expect a third, significantly larger, fiscal package to emerge soon in the U.S. – likely reaching $1 trillion, or 5% of GDP – although there may be twists and turns as it makes its way through Congress.
Selected asset performance, 2020 year-to-date and range
Fiscal and monetary policy action to bridge the economic impact of the coronavirus is starting to take shape as the outbreak and related containment measures propagate across the globe. The policy response has been swift – and we expect total fiscal stimulus to exceed that seen during the global financial crisis. We believe market volatility is distracting from the sheer amount of stimulus being put in place – and there is more to come.
Markets will focus on the PMIs as an indicator of the short-term impact of the virus outbreak. Eyes will also be on an unprecedented virtual summit by the Group of 20 economies (G20) this week, as well as a video conference by the European Union leadership, for signs of more concrete global policy coordination that has been lacking so far.
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