Global Markets Recover As U.S. Investors Await Fiscal Measures

• Stock markets rebound after yesterday’s historic rout
• Trump promises fiscal stimulus measures
• Nature and timing of financial relief sparks debate

Global markets are showing signs of life this morning as fiscal stimulus measures in Japan and the U.S. are alleviating the intense selling pressure of Monday’s historic sell-off. Asian markets are all higher with the Shanghai Composite leading the way with a near 2% gain. The Japanese government has unveiled a second coronavirus package worth $4 billion to help its struggling economy. In Europe, markets are sharply higher with the CAC 40 leading the gains, rising more than 2%. U.S. indexes are all looking to climb around 3% at the open after falling 7% or more yesterday, the biggest drop in 12 years.

The yield on the 10-year U.S. Treasury jumped to 0.6%, its biggest move in more than 6 years. It fell to another all-time low of 0.31% yesterday as investors piled into U.S. Treasuries amid the flight to safer assets.

Yesterday President Trump promised “very substantial relief” in a bid to calm markets and forestall a recession. The president told reporters he will discuss with Congress possible payroll tax cuts and helping hourly wage earners who could miss paychecks amid the COVID-19 outbreak. He added the administration is looking at creating loans for small businesses and working with the struggling hotel, cruise ship and airline industries. “We are going to take care of and have been taking care of the American public and the American economy,” he said. More details are expected today, but Bloomberg reports the package will not help the travel industry. Days ago Trump signed an $8.3 billion spending bill that will support government officials and researchers in the fight against the mysterious disease.

Experts, including those in the administration, are divided on whether targeted measures would be better than a payroll tax cut, which only applies to the working population, and if boosting spending power will be effective if consumers are at home or there are supply difficulties. Yesterday Gita Gopinath, the IMF Chief Economist, emphasized in a blog post that fiscal, monetary, and financial market measures must be targeted. She believes that broad-based fiscal stimulus may help demand, “but would most likely be more effective when business operations begin to normalize.”

This also brings us to the broader discussion about what the federal government can afford right now. Some economists like Claudia Sahm argue the government needs to start spending much more immediately, while others express concern about the soaring national debt and budget deficits and say we need to know more about the impact. Of course, there are the Modern Monetary Theory supporters who argue that the U.S. government doesn’t actually depend on taxes for spending since it can create money on its own. According to this economic theory, federal taxes are meant to create demand for the official currency and control inflation, and deficits are nothing to be afraid of.

Federal Debt Held by the Public