The Fed’s faltering monetary stimulus failed to assure freefalling markets as the full extent of the coronavirus outbreak became clear, and BlackRock believes governments around the world need to take a war footing to prevent more damage.
“The situation underscores how monetary policy alone, no matter how bold it might be, will be insufficient to fend off concerns over the fast-spreading COVID-19,” BlackRock said in a note.
“Above all this is a medical issue, and for now closures of schools, restaurants and bars, and numerous event cancellations have elevated uncertainty about the economic outlook.”
However, increased testing for the virus and tightening of movement appears to be working, while fiscal stimulus – although taking longer to materialise – should also help right the ship.
BlackRock is continuing to focus on fundamentals – including balance sheet strength, debt loads and sustainable cash flows – despite the fact that they don’t seem to work when “fears influence behaviour more than rational thinking”.
“We are confident that companies with strong fundamentals will be best positioned to survive after the dust settles and growth picks up,” BlackRock said.
It’s also keeping a close eye on US markets, which have continued to fluctuate with every move made by the Federal Reserve and Trump administration.
“Some signposts we are watching include: stress in the leveraged loan market (rising), the Overnight Index Swap – and indicator of interbank lending – (falling), signalling the Fed liquidity injection is working somehow, albeit the Fed has yet to address some other credit market risks,” BlackRock said.
“Specifically, stresses in commercial paper need immediate attention. The Fed’s actions on Sunday did not address this, but we believe it is a high priority for the Fed and the Treasury and they will get to it.”
