Or is this the only pacifier they could hope for?
The big talk to start the week is that we may potentially see global central bank stimulus in the coming days to alleviate the pain caused by fears surrounding the virus outbreak.
There is even chatter of an emergency 50 bps rate cut by the Fed with the RBA likely to kick things off tomorrow when announcing their latest policy decision.
Essentially, all of this kicking and screaming - in terms of rates market pricing mostly - is the market telling governments and central banks to get up and do something in order to provide relief following the major rout in equities over the past week or so.
This all sounds good as we have seen a reaction by the Fed and BOJ to inject some calm since the end of last week but is this the right kind of pacifier to appease the market?
This market is so used to demand-side shocks that it is reacting in perhaps the only way it can to try and stop the pain from getting worse. But if the virus outbreak threatens to become a global pandemic, this may not necessarily help whatsoever.
In the event of a major supply-side shock across the globe, zero rates or even negative rates can only do so much. I won't argue that they are needed but central bank stimulus isn't going to address the systemic issues caused by any supply-side shocks.
For now, the market can take some relief that we are seeing central banks stepping in to intervene. But just be wary that this may just lead to a dead cat bounce rather than a confirmed V-shaped recovery as the virus continues to rampage on.
Again, just because it isn't a deadly virus - in terms of mortality rate - does not mean that it won't have an effect on the world economy or that investors have overreacted due to exaggerated fear in the past week.
The fact that the virus has the potential to be a major inconvenience and impact the general workforce, shut down businesses, and weaken consumer sentiment - among other things - is in itself something to worry about if it becomes more widespread.
In any case, this article by Mohamed El-Erian makes for good reading on the current situation. As he points out, don't confuse the willingness of governments and central banks to act with effectiveness of their actions.
At the end of the day, it still depends on how the virus situation develops across the world and how countries are going to react to it.
