The Fed's dramatic move to cut rates gave Wall Street an initial boost, before markets headed south dramatically. It sets up the Australian sharemarket to resume suffering heavy losses after Tuesday's tepid rally, which saw it gain 0.8 per cent. At 7.55am AEDT, futures are pointing to a drop of 73 points, or 1.2 per cent, at the open this morning.
1. US Fed shocks the market: In an extraordinary move overnight, the US Federal Reserve has cut the US Federal Funds Rate by 50 basis points, as an emergency measure to protect the US economy from the expected impacts of the coronavirus.
Wall Street initially jumped on the Fed move before plummeting as the day wore on. Credit:AP
The move was largely unexpected, though not entirely surprising. The decision illustrates the Fed’s clear concern about the potential impacts of the coronavirus on the US economy. It’s the first time since the Global Financial Crisis that it’s taken such extraordinary steps to support the economy.
2. More rate cuts expected to come: Market participants had been pricing-in a 50-basis point cut from the Fed at its next meeting on March 18. And they’re still pricing in more moves from the Fed at that meeting now too, as markets position for major US economic disruption.
It’s considered only a matter of time before other global central bankers follow suit with their own easing measures. Interest rates cuts, it’s often quipped, are like cockroaches: if you see one, there’s often more of them around.
3. G7 teleconference fails to calm market: The markets were somewhat hoping that indications of such activist central bank policy might come yesterday out of the G7’s emergency teleconference. But other than a commitment in principle to fight the virus, as well as piecemeal pledges to inject fiscal stimulus into the economy if "appropriate", a coordinated policy response was absent.
It was a setback to market sentiment, which was slightly offset by the Fed’s move overnight, but one that overall proved to derail risk appetite.
4. RBA delivers its coronavirus cut: Of course, Australian monetary policy was the star attraction in markets for a little while yesterday. The RBA cut interest rates as expected by 25 basis points, in a move to "support the economy as it responds to the global coronavirus outbreak".
The cut was widely expected, with the market leaning in the lead-up to the meeting the RBA would lower the cash rate by 50 basis points. It didn’t, and that sent the Aussie rallying yesterday, with the ASX200 falling post the decision.
5. ASX expected to tumble today: The ASX200 is expected to drop again today, off the back of the new turmoil witnessed in US markets last night. SPI Futures are pointing to a 73-point loss for the ASX200 at the open this morning, though that number is proving highly variable amidst the overnight volatility.
The day’s trade will follow on from what was, relatively speaking, an underwhelming rally for the ASX yesterday. It failed to capture Wall Street’s momentum from the night prior, to only close 0.69 per cent higher.
6. Market sentiment hit by surprise move: It was another wild night in European and US markets overall. The Fed’s 50-pointer initially supported market sentiment, as investors got a little giddy on the prospect of cheaper money.
But the fundamental concerns about the coronavirus, and whether monetary policy would really stop a slow-down in the US and global economy, prevailed. The VIX spiked once again, to trade back around the 40 mark – a level entirely unconducive taking confident long positions in risk assets.
7. Volatility continues to rein: The US stock market erased a significant margin of its Monday rally. US Treasury yields plummeted, with the yield on the 10 Year Treasury note piercing 1 per cent and trading at an all time low.
The USD took a spill, while the Yen rallied by over 1 per cent. The Aussie Dollar also climbed nearly 1 per cent. The gold price spiked over 3 per cent. And the oil price swung, as traders also priced in a proposed oil-supply cut from OPEC.
8. Market watch:
ASX futures were down 69 points or 1.1% to 6299 near 7.15am AEDT
- AUD +1% to 66.00 US cents
- On Wall St near 3.15pm: Dow -2% S&P 500 -2.6% Nasdaq -2.1%
- In Europe: Stoxx 50 +1% FTSE +1% CAC +1.1% DAX +1.1%
- Spot gold +3.3% to $US1641.61 /oz at 1.42pm New York
- Brent crude -0.5% to $US51.65 a barrel
- Iron ore -0.4% to $US88.55 a tonne
- Dalian iron ore +0.9% to 644.5 yuan
- 2-year yield: US 0.70% Australia 0.45%
- 5-year yield: US 0.75% Australia 0.48%
- 10-year yield: US 1.01% Australia 0.79% Germany -0.63%
- 10-year US/Australia yield gap: 22 basis points
This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG
Information is of a general nature only.