Markets have their fiscal and monetary stimulus, but still, they’re not happy. What would it take to improve market sentiment?

The one hope in the unrelenting gloom of the past few weeks in financial markets has been that policymakers would charge to the rescue. Yet after an interest rate cut and a substantial stimulus in the Budget, markets are still sliding. What more do they need?

In his first Budget as Chancellor, Rishi Sunak dramatically ended a decade of austerity, announcing big rises in public spending and a £12bn emergency stimulus package to counter the impact of the coronavirus outbreak.

However, despite the upbeat view from the Treasury, markets had yet to be convinced. The FTSE 100 dropped a further 1.4% to levels not seen in four years with no sign of any immediate respite.

To some extent, looser monetary and fiscal policy had already been priced into markets. All that was left was to decide what form fiscal stimulus should take. Equally, it will take more than the UK government and the Bank of England to restore equilibrium to markets. All eyes are on the US.

The emergency rate cut from the Federal Reserve was greeted with a shrug and markets are expecting more. However, unlike the Global Financial Crisis, monetary policy is unlikely to cut the mustard for this particular crisis. Businesses can’t rely on the uncertain transmission mechanism of the banks to solve the short-term liquidity crisis created by the spread of the virus. They need something quick and dramatic to stop them going bust. This is where fiscal stimulus should step in.

While Donald Trump is not averse to fiscal stimulus, there is a political problem. The Democrats now lead the House of Representatives, and they are unlikely to want to vote through a stimulus package that may help the President stay in office. They won’t want to be seen as blocking change either, but it may curb the Republicans’ ambitions.

However, what the market wants is to see some sign that the virus is rolling over. Unfortunately, this is unlikely to happen in the near time. Even if we assume that the market takes the same trajectory as that seen in China, we have many weeks left before cases peak, and we know the extent of government prevention measures.

Ultimately, while Rishi Sunak’s measures today may help the UK bounce back faster, they were never likely to calm markets in the short-term. That would take a lot more than £12bn.

This article was sourced from Adviser-Hub.co.uk.