by BW staff

The stock market has had to absorb a number of unsettling headlines on financial and economic matters over the past several months. But it was news of an event outside the realm of finance—an outbreak of swine flu in Mexico and other countries—that rattled the market on Apr. 27. Equities were whipsawed amid speculation about the effect the outbreak would have on economies worldwide.

BusinessWeek rounded up comments from Wall Street economists on the swine flu outbreak and topics vital to the economy and the market on Apr. 27:

Julian Jessop, Capital Economics

The outbreak of swine flu in Mexico and its spread to other countries has inevitably raised questions about the broader economic and market implications. While not wanting to downplay the social costs or uncertainty about how the disease might evolve, an initial comparison with the SARS crisis is reassuring.

The worst-case scenario is the sort of global flu pandemic that the World Bank estimated last year might eventually cost up to 4.8% of world gross domestic product (more than $3 trillion). But this assumed that 1% of the world's population would die as a result of the pandemic—some 70 million people. This possibility clearly cannot be dismissed entirely.

Influenza has a long track record as a mass killer. The best-known example is the "Spanish flu" pandemic of 1918, which is estimated to have caused at least 50 million deaths worldwide (250,000 in the U.K.). Strains of Asian flu also killed 33,000 in the U.K. in 1957-58 and 30,000 in 1968-69. However, there is no hard evidence to suggest the current outbreak will evolve along these lines. Indeed, the world economy has shrugged off periodic outbreaks of avian flu for many years.

Tony Crescenzi, Miller Tabak

Three-month Libor, down for the 20th straight day, fell to 1.5375% [on Apr. 27]. That's down 1.875 basis points from Friday [Apr. 24] and its lowest level since June 2003. The downward pressure on Libor includes the generous liquidity injections by the world's central banks as well as a reduction in anxieties regarding counterparty risks. Further decreases in Libor are likely. Importantly, at 80.5375 basis points, the spread between three-month Libor and the federal funds rate is for the first time at its pre-Lehman level. Historically, a spread of closer to 12.5 to 25 basis points was normal. Upcoming spread declines will occur largely in response to a further expansion of the Fed's balance sheet, which has the effect of boosting the amount of money available in the interbank system.

Other money market rates are following Libor lower. For example, the rate for 90-day asset-backed commercial paper is today at 0.98%, its lowest since January and well below the peak of 6.18% last September. Libor's decline is important because it signals stabilization in the money market and in risk attitudes.

Edward Yardeni, Yardeni Research

Government officials expect those banks that received TARP money to lend more to creditworthy borrowers. At the same time, they want the banks to raise more capital to cover losses on projected bad loans. The bankers don't know if they are coming or going, so they are hiding in cash rather than making loans since it is too challenging to find worthy borrowers in a bad recession.

The Fed's weekly data on commercial bank balance sheets show that they held $1.03 trillion in cash in mid-April, up from $301.3 billion on Sept. 10, 2008. The large banks held a record $523.4 billion on Apr. 15, up from $142.7 billion on Sept. 10, 2008. Since the beginning of the year through mid-April, bank loans are down $113.3 billion, with loans at the large banks up $75 billion.

Mark Arbeter, Standard & Poor's Equity Research

We think the [stock] market has reached an inflection point, and, in our view, needs to correct some of the excesses that have built up among many of the technical indicators we watch. Technically, the market has paused in this area because it reached pretty thick chart resistance or overhead supply. Over the last couple of weeks, supply of stock has started to match the demand for stock. It's just simple Economics 101, in our view.

At the same time, those fortunate enough to have caught the bottom have very nice profits, especially in some individual stocks that were priced to go out of business down near a buck, so it is logical to take some green off the table. In addition, many of the sentiment indicators we monitor are swimming in an optimistic state, which often marks the end of the good times. All this raises the caution flag.

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