US stocks had their worst day since 1987 even after the Federal Reserve’s (Fed) announcement to flood the market with $5 trillion dollar over the next month. The Dow closed 9.99% down, as the S&P500 and Nasdaq slumped 9.51% and 9.43% respectively.
If the additional Fed liquidity couldn’t get investors excited, it is perhaps because the sell-off isn’t due to a thinning liquidity. In contrary, there is a gradual rise in trading volumes across the leading market indices as the sell-off deepens. This means that buyers are around, the liquidity is not drying up.
It seems like there is nothing the policymakers could do to stop bleeding. The combo of coordinated fiscal and monetary interventions proved inefficient dealing with coronavirus-induced global sell-off. As we have mentioned in our earlier reports, trying to boost activity through cheap and abundant liquidity at a time companies slow down operations to stop the coronavirus contagion is swimming against a strong current. At this point, there is little alternative to letting the knife hit the ground.
Heavy market headwinds in New York spoiled the mood in last day of trading in Asia, but not everywhere. The Nikkei lost 6.08%, Hang Seng fell 2.01%, but the ASX 200 bounced 4.42% higher as oil gained.
The latest sell-off has been a good test for the oil market. WTI crude held ground above $30 a barrel, laying the foundations of a solid support at this level. A market correction could encourage a recovery toward the $38/40 area, but thick offers could prevent further gains if disaccord between Saudi and Russia leads to a price war in oil markets, on top of the significant coronavirus-induced slump in demand.
In Europe, the European Central Bank (ECB) refrained from cutting the interest rates lower but opted for measures to incentivize higher bank lending and an expansion of 120 billion euro to its Quantitative Easing program. As such, the ECB is one of the few major central banks to have remained pat on rates. The other two are the Bank of Japan (BoJ) and the Swiss National Bank (SNB), who already run on negative rates and probably see no benefit in further cuts.
The ECB’s intervention fell short of expectations. The DAX and the CAC sank another 12% on Thursday. But we doubt a rate cut would’ve given them a different destiny.
The US dollar gained, and the yields shifted higher despite the Fed announcement. The US 10-year yields recovered to 0.84%. One plausible explanation could be that money freed from sold global equities may be pouring into the US dollar as investors turn to cash buying cheap US dollars. Another explanation is the flight to safety.
The euro fell to 1.1184 against a broadly stronger US dollar on Thursday, then rebounded to 1.12. Unchanged euro rates versus significantly lower interest rates and prospects for deeper cuts elsewhere should lead to a stronger euro in the medium term. The narrowing rate differential should play in favour of the single currency against the US dollar and the pound. The euro should maintain a steady grip above the 1.10 mark against the US dollar and it is just a matter of time before the single currency steps above the 0.90 handle against sterling.
The pound shortly crashed to 1.2490 against the greenback. Dip buyers stepped in near the 1.25 level. Cable should meet resistance approaching the 200-day moving average, if faced with a sustainable US dollar recovery.
The FTSE 100 tanked 640 points yesterday to the lowest levels in more than seven years. The 30-billion-pound fiscal support, the 50-basis-point interest rate cut, nor the additional monetary stimulus package helped improving appetite in British stocks. Banks, energy and mining stocks lost big.
Trading on FTSE futures (+3.50%) hint that the British blue-chip index may lick its wounds today. Cheaper sterling and steady oil should give some support to the index, but gains remain fragile.
