- Fed surprises with emergency 50-bps cut but markets continue to fear the worst
- US stocks stage turnaround after Joe Biden wins big on Super Tuesday
- Dollar slumps, yen and gold surge after Fed’s shock rate cut; is BoC next?
Fed fails in attempt to soothe market panic
The US Federal Reserve shocked markets by slashing its benchmark interest rate by 50 basis points in an emergency meeting on Tuesday as policymakers intervened to calm jittery traders. The decision came just hours after the G7 issued a statement pledging to use all policy tools to support the global economy from the virus fallout. However, world leaders stopped short of outlining specific measures, disappointing those that had been hoping for some sort of coordinated action.
But that having failed, it would have been reasonable to assume that an emergency rate cut by the world’s most important central bank would have done the trick in restoring confidence in the markets. However, it seems that now that investors have the Fed on board in recognising the need to lower borrowing costs, they are no longer convinced that monetary policy is the right tool to fight the outbreak of the coronavirus.
In fact, after swinging wildly between positive and negative territory, US equities ended the day down by almost 3%, with European stocks paring their earlier gains as a result. The Fed’s failed bid to reassure Wall Street indicates markets have yet to fully price in the potential economic impact of the virus outbreak and that there’s more pain to come for risk assets.
A resurgent Biden better than a rate cut
After the Fed’s unscheduled rate cut ended up creating more panic than allaying concerns about the virus impact, investors found some solace in the results of Super Tuesday where 14 US states voted to choose their favourite for the Democratic nominee of the 2020 presidential election.
The big winner of the night was undoubtedly former Vice President Joe Biden, who made a remarkable comeback after a lacklustre start to his campaign. Biden now has more delegates than his main rival, Bernie Sanders, and this is music to Wall Street’s ears, who have less to fear from Biden’s centrist policies than Sanders’ socialist agenda.
US stock futures were last trading around 1.5% higher, while shares in Asia and Europe were mixed.
Dollar skids on Fed decision as Treasury yields sink
The US dollar extended its slide after the Fed’s aggressive rate cut, which pulled the yield on 10-year Treasury notes to fresh all-time lows, falling below 1% for the first time. The plunging yields weighed heavily on dollar crosses, with dollar/yen slumping to 5-months lows to briefly slip below the 107 level, while the euro flirted with the $1.12 level for the first time since early January.
Another beneficiary of the dollar sell-off and declining bond yields was gold, which soared by more than 3%. The precious metal was slightly softer today to trade near $1635 an ounce.
The antipodean currencies were also on a stronger footing, with the Australian dollar edging back above the $0.66 handle. The aussie was lifted by better-than-expected Q4 GDP numbers out of Australia earlier today, though it did wobble from a massive drop in China’s services PMI in February.
The Canadian dollar was similarly firmer versus its US counterpart even as investors priced in a strong probability that the Bank of Canada could cut rates by as much as 50 basis points when it announces its policy decision later today. In addition to the BoC meeting, traders will be keeping an eye on the ISM non-manufacturing PMI and ADP employment report out of the United States for possible signs that the virus epidemic started to affect US growth in February.