The field has narrowed in the race to obtain the US Democratic party’s presidential nomination. Fifteen US states held electoral primaries this week in a day known as ‘Super Tuesday’. Super Tuesday holds an elevated importance in the US electoral process as the day when the greatest number of states hold primaries. Candidates vie for more than a third of the delegates for the Democratic National Convention in one single day. A positive result on Super Tuesday can give a candidate the momentum to obtain the 1,991 delegates required to obtain the nomination and the chance to run for President.
Following Tuesday, the field has narrowed considerably and there are now just two plausible candidates for the Democratic nomination; former Vice President Joe Biden and self-declared ‘Democratic socialist’ Bernie Sanders. In a demonstration of Super Tuesday’s significance Biden, after winning 63.3% of all votes, has been propelled to the lead despite a series of disappointing results in earlier primaries.
The emergence of Biden and Sanders as the frontrunners reflects a wider battle in the Democratic party between the moderate and socialist factions. Sander’s policy agenda places him as the leader of the latter and would result in a vast expansion of US government expenditure, the abolition of private health insurance and the imposition of vast swathes of regulation.
Given the radical nature of Sander’s economic policies it is not surprising that a positive market reception was the immediate effect of Biden gaining the lead. US equities gained on Wednesday as the graph details below, reversing some of the declines that followed the Federal Reserve’s (the Fed) emergency rate cut.
Coronavirus Policy Responses
In a somewhat surprising move, the Fed cut interest rates by 50 basis points on Tuesday, in response to growing concerns over the coronavirus outbreak. This was the first emergency rate cut by the Fed since the Global Financial Crisis of 2008 and brings their interest rate target range down to 1% to 1.25%.
By cutting their target range, the Fed hopes to lessen the impact of the Coronavirus on the US economy. Reducing interest rates has the effect of lowering borrowing costs for consumers and businesses, thereby stimulating demand. It also helps companies improve cash flows, as less capital is required to service debt.
On Monday, equity markets posted positive gains on expectations of a rate cut at the Fed’s next meeting on the 18th of March. However, the surprise nature of Tuesday’s cut elicited a negative reaction from markets, with the S&P 500 falling 2.4% and the Dow Jones dropping by 2.6%, with investors left wondering if the US economy could be impacted more heavily by Coronavirus than first thought.
Many central banks around the globe have followed in the Fed’s footsteps by cutting rates, with more expected to do so. The Bank of Canada cut rates by 50bps to 1.25% on Wednesday, as did central banks in Saudi Arabia, the UAE and Bahrain. The cuts from the Gulf States are necessary due to their currencies being pegged to the US Dollar.
Meanwhile in the UK, the Bank of England decided against a rate cut as recently as January 30th. However, incoming Governor Andrew Bailey told the Treasury Select Committee on Wednesday that a cut in rates was now more likely. In contrast its US counterparts, The FTSE 100 closed up by 1.5%, with markets pricing in a 25-basis point cut at the end of the month.
The rate cuts implemented this week will have little short-term impact, as monetary policy operates on a lag. While the emergency nature of the Fed’s cut was jarring for investors, the beneficial impacts of this action will be tangible over the coming year and may mitigate any temporary softness seen in economic data. Additionally, more governments and global institutions are poised to act. The US and Italy have both announced stimulus packages worth $8 billion and €8.4 billion respectively. Likewise, the IMF have pledged up to $50 billion to support economies requiring stimulus. Taken together, the vigilance of policymakers is apparent, helping to offset any adverse impacts over the medium-term.
As always, we will keep you informed of developments as they emerge via our Weekly Round-Up and our Morning Markets video series.
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