What a week we’ve had… Yesterday the US Fed did something they hadn’t done since oct 2008. Oct 2008, for some reason that time period stands out but I can’t quite put my finger on why, OH YA, Lehman Brothers went belly up & the global financial system was in shambles!
So what did the Fed do? The Fed had a scheduled meeting for 2 weeks from now but decided to do an emergency rate cut of not 0.25% but 0.5%.
Fast forward to this morning & the Bank of Canada matched them with the same 0.5% drop. This was the first time Canada has done such a move since spring 2009. Not very encouraging precedents…
The reason for the big move was due to the corona virus. Regardless of whether you think this is overblown hype or a legitimate concern, the reality is covid19 brought China’s economy to its knees. China consumes about half of the world’s resources so that alone poses a problem for a commodity based nation like ours.
But what can Central Banks really do to interest rates that are going to counter that? They’re not buying oil. They’re not buying plane tickets. Earlier in the week we saw the Bank of Japan step in with 500 BILLION yen in liquidity injections, followed by the Bank of Australia cutting rates, but both their respective markets, just like the US, rose briefly then fell. What we are seeing is Central Banks losing their ability to actually impact markets & growth.
So what happens from here? Is this big move the only we’ll see? If you’ve been following these summaries of mine then you’ll know that I’ve been expecting lower rates since the summer. The US has a dollar shortage & strength problem they’re trying to fix. You’ve got the eurozone on the brink. I think this is going to be a race to the bottom. And all that was before coronavirus.
I’ve been following this virus since mid January & it was pretty clear even back then that this is an incredibly contagious virus. Anyone who looks at how exponential growth works can see how quickly this can overwhelm a country’s resources, particularly healthcare, & that, to me, is the big risk here at home. Call me a fear monger or buying into the hype, or whatever… a country like China doesn’t completely shut down if it wasn’t absolutely necessary.
So in summary, big rate drop today. Bond yields are either at or near all time lows. The loonie is weak. Business investment is down. It’s not a pretty sight & it appears this could just be the beginning.
How’s that for a happy morning update? I’m Ryan, thanks for watching & have a great day.