Wednesday, March 4, 2020

Asia Times: The Fed’s extraordinary rate cut fails to lift market sentiment

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Federal Reserve

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Market Recap: The Fed’s extraordinary rate cut fails to lift market sentiment

The Fed cut rates on Tuesday by half a percentage point to a target range of 1.00% to 1.25% in an emergency rate move, the first since the 2008 financial crisis. Equities gained initially on the unexpected move from the Fed, with the S&P500 recovering to as high as 3,136.72. But the equities market experienced a reversal later on in the trading session, likely as market participants viewed the emergency move by the Fed as a signal that the economic impact of the virus may be on par with previous financial crises. The historical instances where the Fed cut rates outside of its usual monetary policy meetings were in August 2007 (Global Financial Crisis), January 2008 (Global Financial Crisis), October 2008 (Global Financial Crisis), September 2001 (September 11th terrorists attacks), April 2001 (Post Dot-Com Bubble), January 2001 (Post Dot-Com Bubble) and October 1998 (Russian Financial Crisis). Each of the major indices in the US fell more than 2% as a result.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones -2.94% -785.91 25,917.41
S&P500 -2.81% -86.86 3,003.37
Nasdaq -2.99% -268.08 8,684.09
*Source: Bloomberg

The unexpected rate cut resulted in the dollar sharply falling against other major currencies, with the Dollar Index losing 0.21% on Tuesday, the fourth straight day the index has fallen. The question now is what further action can the Fed take to help prevent a large-scale economic slowdown. Fed fund futures imply that traders still expect a rate cut two weeks later during the Fed's monetary policy meeting in the middle of March, with probabilities reaching roughly 161% on Wednesday morning.

The Canadian dollar fell sharply against the greenback however, as the emergency Fed rate cut boosted speculation that the BoC will cut rates by 50bps as well. Overnight index swaps implied probabilities for a rate cut by the BoC skyrocketed after the Fed's announcement, from 103.7% to 170.5% as of 8.55am (GMT +8).

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Meanwhile, safe haven assets surged on Tuesday, as capital flowed out of riskier assets amid worries for the economic impact of the virus to be on par with previous financial crises. Gold spiked 3.24%, recovering almost all of its losses during last Friday's sharp decline. The yen strengthened 1.11% against the dollar. US Treasuries advanced across the board, with benchmark 10-year yields falling 16.4bps to reach a new record low of 1.00%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +3.24% +51.46 1,640.90
Silver +2.89% +0.48 16.67
JPY +1.11% +1.20 107.13
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -20.4 0.70%
10-Year -16.4 1.00%
30-Year -10.7 1.61%
*Source: Bloomberg

Oil markets were mixed on Tuesday as oil traders waited on OPEC's meeting later this week. Brent crude futures were relatively flat, losing 0.08% or US$0.04 to US$51.86 per barrel while WTI crude futures were slightly lifted by the Fed's rate cut, gaining 0.92% to US$47.18 per barrel.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude -0.08% -0.04 51.86
WTI Crude +0.92% +0.43 47.18
*Source: Bloomberg

Stocks in Asia is likely to be mixed on Wednesday as investors take in the potential effects and repercussions of the Fed's emergency rate cut. The Nikkei, KOSPI and ASX200 all started Wednesday's trading session lower, although the KOSPI managed to edge higher later in the morning.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index -0.20% -42.50 21,096.81 8:29:20 AM
KOSPI Index +1.13% +22.81 2,037.83 8:49:20 AM
ASX200 Index -1.30% -83.38 6,352.70 8:49:06 AM
*Source: Bloomberg

Economic releases for the day ahead include (GMT +8):

  • US Feb Private Employment Change (ADP) (9.15pm)
  • US Feb Non-Manufacturing PMI (ISM) (11pm)
  • BoC Monetary Policy Decision (11pm)