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Standard Bank Group
The SA Daily 17 March 2020

Global stress index closer to GFC levels

  • The global financial stress indicator, a cross-market measure of risk, hedging demand and flows (calculated by Bank of America), has now spiked near 2008/9 GFC (global financial crisis) levels on investor anxiety about the ultimate impact of COVID-19. There’s been a steep rise in particularly the sub-indicator of flows, a measure of asset price momentum for equities, bonds and money markets, calculated using investors’ flows and volumes.
  • The COVID-19 viral outbreak may well trigger a deep global economic downturn, perhaps similar to, if not worse than, the impact of the 2008/9 US sub-prime crisis. At that time, though, central banks had more room to ease rates and implement QE to cushion their economies. Emerging markets too slashed interest rates and also embarked on fiscal stimulus. Indeed, those measures averted a more severe crisis, as financial markets recovered quite quickly.
  • However, the current economic and financial crises triggered by the outbreak has disrupted economic and tourism activities at a time that major central banks have little room to ease rates, and some, such as SA, have virtually no fiscal space.
  • In 2008/09, major central banks cut interest rates sharply between September 2008 and May 2009, with New Zealand cutting by a cumulative 575 bps; BoE by 525 bps; the Fed by 500 bps, Bank of Australia by 350 bps and the ECB by 300 bps.
  • Now, with many policy rates at or near zero, central banks may rely more on bond purchases/liquidity injections.
  • The SARB will likely cut by 50 bps this week in response to the downward growth and inflation pressure from COVID-19, but fiscal policy space is in a corner.

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