Commentary from Morgan Stanley

Key differences from the ‘policy saves’ of 2019 or 2012: Coordinated easing was successful in turning around markets in early 2019 and mid-2012. But the “problems” of 2019 and 2012 (high real interest rates, a lack of demand for European bonds) were issues that monetary policy could directly address. Current risks to supply chain disruption and consumer confidence, especially when interest rates are already near all-time lows, may potentially be harder to address directly.

Market performance after ’emergency’ rate cuts is (notably) poor: Looking at the last six inter-meeting rate cuts of 50bp+ by the Federal Reserve, the median 3m and 6m performance of global equities was 1.7% and -5.7%, respectively. The median 3m and 6m excess return for US High Yield credit was -2.2% and -5.0%, respectively. The reason? These emergency cuts mostly happened at times of rising economic risk.

Fiscal policy would have a greater impact, but slow-moving; further bond buying most helpful to equities and credit: While the G-7 could make positive noises on fiscal action, actual policy takes time to pass and enact. We think the market would respond most favourably to an increase in central bank asset purchases, but this is not our economists’ base-case expectation.

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