Wednesday, March 4, 2020

Fed’s Early Rate Cut Fails To Boost Sentiment

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What’s happening: US stocks plunged on Tuesday even after the Federal Reserve announced its biggest interest rate cut since the 2008 financial crisis.

What happened: The Federal Reserve lowered its benchmark interest rates by 0.5% in an emergency measure, amid growing concerns of the coronavirus impact on the US economy. Stocks briefly rallied after the rate cut, which came after the G7 (Group of Seven IMF- advanced economies in the world) meeting. Investor sentiment didn’t hold up, however, for too long and equities ended the day lower yet again.

Why the markets plunged: Stocks initially moved higher, with the Dow gaining around 350 points following the Fed’s decision. However, the gains didn’t last long, and stocks fell back sharply within just 15 minutes. The rate cut decision came two weeks ahead of the Fed’s March meeting as the central bank thought early steps were required to combat the impact of coronavirus spreading globally.

The central bank cut the range of its fed fund target rate to between 1% and 1.25%, representing the first emergency action taken before a scheduled Fed meeting since the 2008 financial crisis. Neither the Fed’s action nor the G-7 comments succeeded in lifting investor sentiment.

The Dow tumbled 786 points to close at 25,917 on Tuesday, while the S&P 500 and Nasdaq 100 declined by 2.81% and 2.99%, respectively. The decline followed the previous day’s jump of 5.1%.

Why it matters: Markets were widely expecting the Fed’s move this month, with the bond market pricing in a 100% probability of a rate cut in March. All members of the Fed voted unanimously for the cut and warned that COVID-19 “poses evolving risks” to the country’s economy.

The decision comes after G7 countries vowed to use “all appropriate tools” to fight the impact of the virus outbreak. Goldman Sachs lowered its growth forecast for the US to 0.9% for the first quarter and to 0.5% for the second quarter, while projecting a return to 2.25% growth in the fourth quarter. The Federal Reserve, which had begun the year by indicating no further rate cuts in 2020, is likely to ease its monetary policy further. The bond market is already pricing a probability of over 88% of at least one more rate cut by the end of this year, especially after Fed Chairman Jerome Powell said that the central bank would “continue to closely monitor developments” in the weeks and months ahead.

Investor sentiment did not improve even after news of continued decline in new coronavirus cases in China, which reported 119 cases on March 3, down from 125 on March 2. Investors focused instead on the rise in cases outside China. Total cases in South Korea have surged to 5,328, while in Italy the number climbed to over 2,000. In the US, 120 cases have been confirmed so far.

What to watch: The Fed’s decision did not push other central banks to ease rates. The Eurozone and Japan have no leeway to cut rates, with their interest rates already in negative territory. Investors are awaiting some major US economic releases, including the ADP report, services PMI and ISM non-manufacturing PMI. Markets may rebound today, with stock futures pointing towards a higher open. Private businesses in the US, which hired 291,000 workers in January, are expected to have created 170,000 additional jobs in February. Analysts expect the IHS Markit services PMI to decline to 49.4 in February, from 53.4 in the previous month. The ISM non-manufacturing PMI is projected to fall to 54.9 in February, from 55.5 in January.

The Markets Today

     

Crude oil is likely to be in focus today, ahead of the EIA’s (Energy Information Administration) report on oil supplies in the US scheduled to be released today.

Context: WTI crude oil settled higher on Tuesday but was down from the day’s highest levels, after the Federal Reserve surprised markets by announcing an emergency rate cut.

Details: Oil prices were trading sharply higher initially in the session, driven by hopes of further reduction in oil production by the OPEC+ countries. April WTI crude gained 0.9% to end at $47.18 per barrel, while May Brent crude settled slightly lower, down 0.08% at $51.86 per barrel, after having risen as high as $53.90 per barrel earlier in the session. Both oil grades had recorded a rise of around 4.5% on Monday.

OPEC+ countries will be meeting on March 5-6, although the media is not allowed to cover the two-day meeting due to coronavirus fears.

The API (American Petroleum Institute) late Tuesday said that it expects a rise of 1.7 million barrels in crude oil inventories for the week ending February 28.

Why it matters: Following the upbeat performance of oil so far this week, all eyes are on the EIA’s report, scheduled for release later today.

What to watch: Analysts expect the EIA to report a rise of 3.5 million barrels in crude oil supplies for the latest week. Preliminary estimates also show a decline of 2.8 million barrels for gasoline inventories and a decline of 2.4 million barrels for distillates.

Other Markets: Most European indices closed trading higher on Tuesday, with the FTSE 100, German 30 and French 40 up 0.95%, 1.08%, 0.5% and 1.12%, respectively.

Support & Resistances
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market snapshot

     

Futures at 0400 (GMT)

News shaping
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What else to watch today

     

Brazil’s GDP growth rate and services PMI as well as Canada’s productivity and Bank of Canada’s rate decision.