18.03.2020 13:49

Market Outlook: Central banks respond to COVID-19 impact

This past week has been tumultuous, with sharp stock market movements and large-scale economic stimulus measures by central banks and governments in response to the increasing spread of the COVID-19 coronavirus − especially after the World Health Organisation (WHO) declared it a global pandemic. Share price indices show huge upturns and downturns from one day to the next, some days by double-digit percentages. 

Market turmoil will probably last for another while, and there is a great risk of continued large fluctuations in both the stock market and the fixed income market. In times of increased turmoil, we provide you with extra market commentaries that summarise the current situation. You will find the latest one by clicking on the link below:

Extra Market Commentary: Massive global actions

Central banks respond to COVID-19 impact

As the virus spreads to more and more countries, central banks and governments have taken vigorous action to soften its economic impact. Financial markets were disappointed that the European Central Bank (ECB) did not lower the euro zone key interest rate at its latest policy meeting. ECB President Christine Lagarde was later forced to retract her remark that "We are not here to close spreads, this is not the function or the mission of the ECB." Her comment nevertheless caused credit spreads (yield gaps between government and corporate bonds) to widen further, adversely affecting investors in corporate bonds.

But both the Bank of England and Norges Bank carried out extra rate cuts, bringing their key interest rates to 0.25% and 1% respectively. Along with other factors that included falling international oil prices, the action of Norges Bank led to major depreciation in the Norwegian krone. It fell from roughly NOK 9.25 per US dollar on March 8 to NOK 10.22 on March 13 and 10.50 by late on March 17 (yesterday).

Sweden's Riksbank launched about SEK 500 billion worth of extra loans to support lending to businesses. The Riksbank will also boost its quantitative easing (QE) bond purchases by SEK 300 billion. But the biggest central bank response to the pandemic came from the US Federal Reserve, which surprised markets by slashing its key interest rate to almost zero, while joining forces with five other central banks to ensure adequate US dollar liquidity. The Fed also announced a QE programme, with purchases of USD 700 billion worth of Treasury and mortgage-backed bonds aimed at improving liquidity.

National emergency declarations and crisis packages

The United States also surprised the world by imposing a ban on travellers from most European countries, except returning US citizens and residents, and by declaring the spread of the COVID-19 coronavirus a "national emergency". This will enable officials to access a further USD 50 billion in special emergency funds. The White House is considering an economic stimulus that would include sending a cheque for USD 1,000 to every American, at a cost of at least USD 250 billion. Federal officials are meanwhile discussing ways of preventing US-based airlines from going bankrupt due to growing restrictions on travel and other activities. Other countries and the European Union (EU) have followed suit in restricting cross-border travel. More fiscal stimulus in the form of crisis packages was enacted in Australia, Italy, the European Union as a whole, the United Kingdom and other countries.

In Sweden, the Social Democratic/Green Party government and its Liberal and Centre Party budget partners agreed to abolish the one-day waiting period for sick pay and have introduced new proposals on short-term lay-offs and a respite on payment of employer social insurance contributions and various taxes.

The Swedish government's crisis package

So why does the market remain so volatile after all these crisis responses?

First, we are not yet seeing a stabilisation in the number of new COVID-19 infections in many countries. US President Donald Trump has publicly predicted that the pandemic will culminate in July or August. Many observers agree that there will be an endpoint to the spread of the epidemic, but as long as we don't clearly see it, uncertainty will maintain its grip on markets.

Second, there is concern that all the actions that have been taken are not sufficient, or that the cure – official interventions that constrain many people's lives – may be worse than the disease itself. But at present, the speed and scope of COVID-19's spread are the main factors governing the markets.


Our market view

No one knows how far the virus will spread and for how long, or the extent of the steps that will be taken to curtail its spread. But we can assume that market turmoil will persist for a while. In the short term, there is consequently an obvious risk of continued stock market volatility.

Looking a bit further ahead, however, there is reason for cautious optimism. In both China and South Korea, there are signs that the number of people infected with COVID-19 is decreasing. If the rest of the world follows a similar scenario, we still face a difficult period ahead of us, but then there will be potential for stabilisation. Our main scenario is a U-shaped economic trend – a rapid fall, followed by a delayed economic recovery.

If the rest of the world can follow the example of China relatively soon, this means that the economy and production will have good potential to recover during the second half of 2020. All the measures now being put in place will enable the affected economies to grow more vigorously once today’s worries have faded. This may actually create better growth and corporate earnings potential than before the virus outbreak.

However, there is a major risk that the impact of the epidemic may be more serious and long-lasting. Steps to limit the spread of the virus may then have long-term adverse effects on the economy, for example by forcing businesses to lay off employees, which in turn would decrease potential consumption and demand.


In the short term, there is an obvious risk of major new stock market volatility. Today’s turmoil in financial markets will probably persist until the rate of new infections slows. However, past experience provides many indications that long-term investors will be rewarded for waiting out the turmoil we are now seeing.

Please contact your private banker if you have any questions or concerns.