The Cambridge Weekly – 14th April 2020

Fading threat of financial crisis re-opens old divides

These “strange times we live in” are even stranger for those of us working in and around capital markets. Despite the COVID-19 death toll rising to horrifying and previously unthinkable highs, stock markets staged another phenomenal recovery week. At the same time, while economic data flow has only just begun to show the global economy’s ‘medically-induced coma’ (since lockdown only began mid-March) it has already hit depressed levels never seen in our lifetimes. The very real pain felt by people most exposed to the economic shutdown is now starkly visible. Companies are warning everywhere about the risk of defaulting, corporate earnings expectations are in freefall, and we can only draw comparisons with the breadlines captured during the Great Depression era of the 1930s.

European Fiscal Policy is seldom EZ

The one shining light throughout the coronavirus crisis has been policymakers’ willingness to commit to substantial and decisive economic measures. Central bankers were among the first officials to put their heads above the parapet and ensure the financial system had enough liquidity to see it through this economic hibernation. The US Federal Reserve (Fed), European Central Bank (ECB), Bank of England and Bank of Japan have all effectively written blank cheques to their respective governments – by pledging the monetary firepower needed to keep yields and short-term lending rates stable. For the most part, governments have begun to cash in those cheques. In Britain, China and the US, politicians have promised billions – or even trillions – in fiscal spending to stave off the economic disaster that would otherwise come with the lockdown.

China proves that where there’s a will, there’s a way

As the coronavirus crisis deepens across the western world, governments have resorted to increasingly harsh lockdown measures. But in contrast to the pictures of empty streets in Rome, Paris and London, this week we passed a significant landmark on the road to recovery. On Wednesday, Wuhan – the epicentre of the coronavirus outbreak – emerged from its official lockdown. For 76 days, the Chinese city of 11 million people endured probably the toughest and most extensive quarantine measures in history. From mid-February, citizens were not allowed to leave their homes, not even for essential food or medicine. They had to rely on delivery services.

Now, provided they do not have the virus, residents can emerge from their isolation. After a dramatic drop in new cases of the virus, Wuhan’s motorways, airports and railway stations are open again.

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