The Bank of Canada and central banks from around the world are taking drastic steps to limit the damage caused by the coronavirus (COVID-19). The coronavirus has killed more than 3,000 people and infected close to 90,000 globally. First quarter earnings are going to be a mess. The big question is, are rate cuts going to be enough to salvage the global economy in 2020?

How Is the Coronavirus Affecting the Global Economy?

Stock markets around the world are facing their biggest challenge since the global financial crisis. In an effort to stop the spread of the coronavirus, whole cities in China are closed, Japan, Greece, Italy, and Iran have cancelled school. Asian auto companies have stopped shipping and the Tokyo Olympics could be cancelled.

The International Monetary Fund has said that the global spread of the coronavirus poses the biggest risk to the world economy since the 2008-2009 financial crisis.The Organisation for Economic Co-operation and Development meanwhile expects global growth to be half of what it initially projected.

What Are the Central Banks Doing?

Whether or not this panic is justified is a moot point; the fact is, it’s taken hold with markets around the world are plunging and investors worried about their portfolios and retirement.

Enter global central banks. Central banks around the world are looking to reassure investors that they can minimize the impact the coronavirus will have on the global economy and stocks.

The Bank of Japan and Bank of England have both said they are looking at providing liquidity and ramping up asset purchases. The Reserve Bank of Australia cut interest rates to record low 0.5%. The Bank of Canada meanwhile slashed its overnight rate by half a percentage point, to 1.25%, and said other cuts were possible.

The Federal Reserve just cut its key lending rate by 50 basis points to a target range of 1.00% to 1.25%, which is the biggest cut in more than a decade and first since the financial crisis. Chances are good the U.S. central bank will lower rates by another quarter-percentage point in April.

Admittedly, cutting interest rates will not stop the spread of the coronavirus. It will not give people confidence to go outdoors, eat in restaurants and travel, or for factories to open up. What central banks can do though is help give businesses, households, and local governments that have been hurt by the coronavirus access to much needed financial capital.

How Are Stocks Responding to Interest Rate Cuts?

Investors are still not sure how to respond to the interest rate cuts. The last week of February saw stocks experience their worst week since the financial crisis. After five days, U.S. stocks lost more than $3.0 trillion in market value, with the Dow Jones Industrial Average, S&P 500, and Nasdaq all in correction territory.

In response, the following week, the Federal Reserve, Bank of Canada, and other central banks, cut their interest rates. Stocks in Canada, the U.S., Europe, and Asia rebounded. That euphoria was short lived though as the number of people infected by coronavirus in the U.S. and Europe climbed.

During the first week of March, the Dow Jones Industrial Average posted its best two days in history (Monday, March 2 and Wednesday, March 4). It also posted one of its worst one-day losses on Tuesday, March 3.

The fact is, the markets are experiencing huge swings, in and out of correction territory, as investors remain skittish about just how much central banks can help juice global economic growth and how long the market sell-off will last. Investors trying to time the market, and when to get in, must be feeling queasy.

If the coronavirus lasts, people will stay at home, travel and leisure companies will lose revenue, bricks-and-mortar retailers will see a drop in foot traffic, and manufacturers won’t be able to get their parts shipped or products made.

At the very least, first quarter earnings could get seriously gutted. China’s economy could post its first quarterly decline in 40 years, the U.S., and put the U.S., Canada, Europe, and Japan at risk of a recession.

None of this will be good for stocks., Canada’s Leader in Stock Market Trading Courses

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