- Fed goes ‘all in’ – unveils new $2.3 trillion lending program
- Stocks climb, dollar drops, and gold goes into overdrive
- But are markets realistic about the long-term damage?
- Oil falls after OPEC deal disappoints in size and scope
Fed pulls out all the stops to cushion economy, stocks smile
The US central bank rode to the rescue once again on Thursday, rolling out a gigantic $2.3 trillion lending package to help smaller and medium sized businesses as well as local governments to weather the coming recession. The Fed said it would offer cheap loans to companies of up to 10,000 employees, in perhaps the most powerful step so far in the battle against the economic crisis sparked by the pandemic.
In fact, in another sign that policymakers ‘mean business’, the Fed also offered to buy so-called junk bonds of companies that have been downgraded one notch below investment grade recently. That means the Fed is now taking on credit risk as well, leaving it exposed to losses if those bonds are marked down further – something unfathomable just a few weeks ago.
Stock markets cheered, with the S&P 500 recouping early losses to close 1.45% higher, as the stimulus will help negate some of the pain on corporate America and possibly make for a shallower recession. It could also allow some bigger firms to allocate more funds towards buybacks.
Stimulus is a bandage, not a fix
Alas, it’s difficult to have any real faith in this recovery. We are still in the early days of a recession, and while yesterday’s Fed news were enough to eclipse another eye-watering US jobless claims number, the amount and speed at which jobs are being lost is simply staggering. In the last three weeks alone, almost 17 million Americans have filed for unemployment benefits, amounting to more than 10% of the entire workforce and rising, despite a tsunami of stimulus.
Those are going to take years to recover, keeping consumption and growth subdued, something that stock markets may be underappreciating. Perhaps the earnings season that commences next week, and the gloomy guidance by executives, will change that.
Dollar slides, gold shines
The greenback was naturally the biggest casualty of the latest round of stimulus, falling across the board – albeit not massively – as US Treasury yields declined, further eroding its interest rate advantage. What’s striking though is how little the dollar has fallen overall, relative to how much stimulus has been rolled out. The Fed is nearly out of firepower and fiscal packages have been gigantic, yet the reserve currency remains afloat – a testament to fear-driven demand.
Gold was the main beneficiary, as investors priced in an explosion in the Fed’s balance sheet, on top of a rapidly exploding fiscal deficit and a highly uncertain economic backdrop. The case for gold in the long run seems very convincing as governments take on mountains of debt and central banks drown markets in cash, a combination that’s awaking debt-monetization vigilantes from their slumber.
The technical picture concurs, with bullion prices forming an inverted head and shoulders pattern, though a clear break above $1700 is needed to confirm that.
OPEC disappoints, euro snoozes after Eurogroup
As expected, OPEC and Russia agreed to cut their production by 10 million barrels yesterday, but oil prices sold off in the aftermath, as the deal disappointed in size and scope. The baseline for the cuts will be from current levels, which have been inflated by 2.5 – 3 million barrels after the production spree last month, meaning the real cut will only be about 7 million barrels. Furthermore, this will only last for 2 months and then, producers will be allowed to pump 2 million more.
In euroland, the finance ministers finally reached an agreement on a €540 billion rescue package, though there was no breakthrough on the issue of Eurobonds.
Finally, it’s a holiday almost everywhere today so liquidity will be thinner than usual, making sharp market moves possible without much news.
