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U.S. stocks whipsawed by emergency rate cut, virus spread
Vildana Hajric and Michael Hunter, Bloomberg News
U.S. stocks tumbled and Treasuries extended rallies after Jerome Powell said the Federal Reserve cut interest rates after the outlook for risks to the American economy changed “materially” because of the coronavirus.
The S&P 500 headed for its eighth drop in nine days after getting whipsawed following the central bank’s emergency 50 basis-point cut of its benchmark rate. Powell said during a press conference that the economy remains strong but the virus outbreak will weigh on activity “for some time.”
The two-year Treasury yield tumbled to 0.74 per cent, while the 10-year plunged toward 1 per cent. Banks led losses on equity benchmarks.
“Does a 50 basis point cut change things? That’s a tough one to answer,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “It could perhaps help the credit markets, especially primary markets that are currently somewhat frozen. But Fed cuts tend to be less effective in situations like this when there is a supply and demand shock.”
Investors had piled out of risk assets last week as the spreading virus threatened to derail global growth, only to pour back in Monday in anticipation of concerted action from Group of Seven officials. Oil continued its rebound Tuesday, approaching US$48 a barrel, while gold also rose. The yen was higher versus the dollar.
“Moving between meetings with a bigger than normal interest rate cut looks like Fed officials are panicking as much as stock market investors did last week,” said Chris Rupkey, chief financial economist for MUFG Union Bank. “They did not need to be so aggressive and the Fed under Powell keeps responding wrongly in our view more to the financial markets than they are to the broader economy. We aren’t in a recession yet and today’s move won’t keep one from coming.”
The OECD warned that growth will sink to levels not seen in more than a decade and ever more businesses are warning about the impact of the illness. President Donald Trump said on Tuesday the Federal Reserve “should ease and cut rate big.”
The governor of the Bank of England, Mark Carney, said it would take all necessary steps to help the economy. Australia lowered its benchmark by a quarter percentage point. Its currency rose, however, underscoring how traders’ expectations have rapidly shifted in recent days.