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Markets and the Coronavirus

The spread of the Coronavirus has affected equities and financial markets around the world.

What the markets and the bankers are really trying to cure is fear. And the medicine of choice appears to be interest rate cuts.

Pressure is mounting on a reluctant Bank of Canada to trim its trendsetting interest rate at its meeting on Wednesday, and at least once more during 2020. Market watchers have put the chances of that at about 2 in 3. Adding to the pressure is the announcement by U.S. Fed Chair Jerome Powell that the American central bank is ready to cut rates again to keep the economy moving in the face of the virus.

The Bank of Canada does have other factors weighing on it though:

  • weak .03% GDP growth in the last quarter of 2019
  • faltering oil prices
  • rail blockades that have stymied shipping and transportation

But there are some things a rate cut will not fix. Falling oil prices are likely to be a structural economic change. The blockades are widely seen as a temporary problem, like bad weather or a strike, that will self-correct without the involvement of the central bank. And any move by the U.S. Fed will be widely discounted as simply ‘doing anything for the sake of looking like they are doing something’.

Sure, cutting rates will likely reduce market fears, but it will only be a temporary relief of symptoms.