All three major US stock indexes were eviscerated on Monday, just 24 hours after the Federal Reserve held an emergency meeting and cut interest rates to zero.
Both the Dow Jones Industrial Average and the S&P 500 had their worst day since the “Black Monday” crash of 1987, with the S&P sliding 12% and the Dow turning in its third-worst day ever, falling 12.9%.
The NASDAQ had its single worst day every, dropping 12.3%.
With record-setting days for two of the indexes, it shouldn’t come as a surprise that the volatility index, the VIX, which is used by many to measure how much fear there is in the markets, saw its highest close ever at 82.69. It beat the previous record of 80.74 set during the depths of the financial crisis.
The trading day started with the markets being halted for 15 minutes shortly after the open when the S&P dropped more than 8%, triggering the so-called “circuit breakers” to prevent a full-on panic sell and maintain order.
It didn’t do much good, as the market continued sliding throughout the day, despite the Fed’s announcement of slashing interest rates to zero and more than $750 billion in monetary relief less than 24 hours earlier.
Even with zero percent interest rates and billions of stimulus money, investors are cautious to invest money back into the market without knowing how the coronavirus will impact the US.
“Although the contemporary crisis is loaded with bad news, this has not been its primary problem. It’s the ‘unknown,’” said Jim Paulsen, The Leuthold Group’s chief investment strategist. “Not even health experts understand what this is or where it is headed, and that is the worst possible outcome for investors. Give me bad news any day over complete uncertainty”
Frank Cappelleri, executive director at Instinet, said in a note: “The markets are getting no break with yesterday’s historic Fed actions and COVID-19 dominating the world’s headlines. While the news continues to worsen and with the price action doing things we’ve only seen a handful of other times in the last century, it’s nearly impossible to keep things in perspective.”
“We can’t argue the facts, and we’re dealing with a much bigger issue than just the economy.” he added.
Even President Trump, a day after praising the Federal Reserve for finally lowering interest rates to combat the economic slowdown caused by the coronavirus, said that the outbreak could last well into August and that the US “may be” heading into a recession.
It’s going to take a clear indication that the worst of the outbreak has passed before many investors would be willing to invest in the market again, particularly with so many industries looking for bailouts to survive the crisis.
Yesterday the US airlines asked for a $50 billion bailout in direct aid and loan guarantees to keep the industry afloat, to which President Trump later said at a press briefing “We’re going to back the airlines 100% – it’s not their fault. We’ll be backstopping the airlines and helping them very much.”
Market Collapse Continues Despite “Monetary Bazooka” From Fed, Rates Cut to Zero
The market collapse continued Monday despite the Fed firing a “monetary bazooka” at the economy during an emergency meeting Sunday night.
The Dow Jones Industrial Average futures were down 5% or almost 1,000 points, triggering the “limit down” level. The S&P 500 and Nasdaq 100 futures also hit their limit down levels, effectively freezing the market overnight.
During the emergency meeting the Federal Reserve cut interest rates to essentially zero, mirroring actions it took during the financial crisis. The official rate is now between 0% and 0.25%, down from 1-1.25%.
Yesterday’s cut comes on the heels of another 0.5% rate cut less than two weeks ago, and is now the lowest its been since 2015.
The Fed also announced a massive $700 billion quantitative easing program that will start today with an initial purchase of $40 billion in Treasurys and mortgage backed securities.
In a statement the Fed says the moves were to shelter the economy from impacts of the coronavirus.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” cut interest rates to essentially zero on Sunday and launched a massive $700 billion quantitative easing program to shelter the economy from the effects of the virus.
Fed chairman Jay Powell said the bank would be “patient” before raising rates again.
“We will maintain the rate at this level until we’re confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals. That’s the test… some things have to happen before we consider… we’re going to be watching, and willing to be patient, certainly.” he added.
President Trump, who has long called for the Fed to lower rates to remain competitive with other countries, quickly released a statement to say he was “very happy” with the move and that people should be “very thrilled.”
However, many are skeptical about the effectiveness of another round of QE, and what will happen next if it doesn’t work, since the Fed now can’t cut rates any lower without going into negative rates.
Peter Boockvar, chief investment officer at Bleakley Advisory Group said: “The Fed blasted its monetary bazooka for sure. This better work because I don’t know what they have left and no amount of money raining from the sky will cure this virus. Only time and medicine will.”
Echoing Boockvar’s statement was Quincy Krosby, chief market strategist at Prudential Financial, who added “The market is at the mercy of the virus and at the mercy of whether the containment policies work.”
The Fed also coordinated with central banks around the globe in an effort to “enhance” dollar liquidity through dollar swap arrangements. Joining the Fed were the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.
The banks agreed to lower the rates on the swap lines as well as increase the length of the loans to 90 days.
After Worst Trading Day Since 2008, Stocks Rocket Higher As Trump Teases Tax Cuts
In a surprise announcement late Monday evening, President Trump said he is working on an economic relief package intended to help those who have been hurt by the coronavirus outbreak.
Trump briefly mentioned a possible payroll tax cut, before saying the relief would be “substantial” and “a really big number.”
Trump said he is meeting today with Republicans in the House and Senate to discuss the possibility of suspending payroll taxes, which is paid by both employers and employees to fund Social Security.
Suspending the tax would boost the size of worker’s paychecks, something Trump has suggested before as a way to boost the economy.
Secretary of Treasury Steve Mnuchin says if the payroll tax is suspended, it will be a temporary move intended to last only a few months until the coronavirus has passed.
“The economy will be in very good shape a year from now. This is about providing proper tools of liquidity to go through the next few months.”
As part of Trump’s plan that we should learn more about this afternoon, the President also mentioned “working on loans for small businesses” and working to help the airlines, cruise lines and hotel industries as they have been hit hard by the coronavirus fears.
He added “We’re going to be working with companies, small companies, large companies, so that they don’t get penalized for something that’s not their fault. It’s not our country’s fault. This is something that we were thrown into.”
The news comes on the same day the stock market had its worst trading session since 2008 and it’s 19th worst day ever, with the Dow Jones Industrial Average plunging more than 2,000 points to close down 7.79% on coronavirus fears and plummeting oil prices.
Trump has consistently focused on the stock market as a barometer for his success as a president, so announcing this relief plan after a historically bad day for the markets doesn’t come as much of a surprise.
At the close of the market Monday, the Dow Jones Industrial Average is down 19% from the all-time high of 29,551 on February 12, less than one month ago. The bull market that started on March 9, 2009 would officially come to an end if the markets drop 20% from their all-time high.
Trump’s announcement sent futures higher, indicating the markets should open trading this morning 1,000 points higher than Monday’s close.
Even if Trump can get a relief plan passed, it’s uncertain if it will be enough to convince buyers to step back into a bull market that is on shaky ground entering its 11th year.
The coronavirus outbreak is widely expected to worsen over the coming weeks and months, and the energy market is reeling from last weekend’s fallout between Saudi Arabia and Russia.
And according to JPMorgan, historically “a market sell-off of this magnitude typically implies a 65% to 75% chance of recession in the next 12 months.”
US Federal Reserve Makes Emergency Interest Rate Cut
The US Federal Reserve has slashed interest rates in an emergency move to protect the world’s largest economy from the coronavirus outbreak, ramping up the global response as the disease spreads.
In a dramatic intervention as the G7 group of wealthy nations promised action around the world to protect jobs and growth amid the unfolding crisis, the US central bank said it was cutting interest rates by half a percentage point to a target range of 1% to 1.25%.
Launching the emergency measure as a pre-emptive strike to protect the US economy after pressure from Donald Trump to act, the Fed warned: “The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity.”
Jerome Powell, its chair, said: “Of course the ultimate solutions to this challenge will come from others, particularly health professionals. We can and will do our part, however, to keep the US economy strong as we meet this challenge.”
As the economic costs mount in a pivotal US election year, Trump said the Fed had not cut rates enough and should go further. Powell insisted the emergency move was not in response to the president’s pressure. “We are never going to consider any political considerations whatsoever,” he said.
Financial markets around the world rallied after the worst week for stocks since the financial crisis, in anticipation of massive coordinated stimulus to protect the global economy. The FTSE 100 closed up around 1% at 6,718.20. However, Wall Street slumped after a rebound on Monday, and was down 600 points by mid-afternoon in New York.
On a day of rapid developments in response to the escalating health crisis:
- The G7 issued a statement saying wealthy nations would use “ all appropriate policy tools ” to tackle the economic fallout.
- The UK government outlined contingency plans, including limits on police and fire service callouts.
- Growing numbers of companies announced profit warnings and told staff to work from home.
Speaking on Tuesday morning before the emergency move from his transatlantic counterpart, Mark Carney said the Bank of England stood ready to cut rates if the British economy required.
In his final hearing before MPs on the Treasury committee before standing down on 15 March, when he will be replaced by Andrew Bailey, the Bank’s outgoing governor said the fallout in Britain could include an “economic shock that could prove large but will ultimately be temporary”.
“The Bank will take all necessary steps to support the UK economy and the financial system,” he added.
Carney said that lines of communication were open with other central banks, that the Bank’s rate-setting monetary policy committee (MPC) met on Monday and that it was still “assessing the economic impacts and considering the policy implications of various different scenarios”.
The next MPC rate decision is due on 26 March, after Carney leaves. However, economists at the Japanese bank Nomura said they anticipated an emergency UK rate cut before the end of the week.
Threadneedle Street has limited room to cut borrowing costs with interest rates at 0.75%, among the lowest levels in its 325-year history. There are also growing expectations that the chancellor, Rishi Sunak, will use next week’s budget to announce financial support to try to lessen the impact of Covid-19.
The coronavirus outbreak is causing widespread alarm. The Paris-based Organisation for Economic Cooperation and Development has warned global growth could be cut in half.
UK banks are starting to offer emergency financing to businesses that are showing signs of strain. Barclays, RBS and Santander have sent messages to thousands of firms to check whether factory disruptions in China have put their supply chains and cash flow at risk.
Barclays has extended its first batch of overdrafts and short-term loans, while the Guardian understands RBS is contacting about 5,000 of its large and small business customers who may be exposed to disruption, offering them similar support.
Twitter told its staff to work from home in response to the outbreak. It has made remote working mandatory for employees in Hong Kong, Japan and South Korea and said it was “strongly encouraging” its global workforce of 5,000 employees to do the same.
In the UK, the impact of the outbreak was reflected in company statements and updates on consumer behaviour. Kantar, the data company, said consumers were stockpiling hand sanitiser, with sales up 225% in February.
The British insurer Direct Line said it had received £1m of travel insurance claims relating to the outbreak. It will pay out for cancellation or curtailment of trips to places such as China, South Korea and northern Italy, if they were booked before the government advised against travel.
The product-testing company Intertek warned that temporary disruption to the supply chains of its clients in China would hit its 2020 performance, while Greggs said the coronavirus added a cloud of uncertainty to its future sales forecasts if shoppers stayed away from high streets.
The tour operator Tui also said it had suffered weaker bookings and set out plans to cut costs with a hiring freeze and postponing non-essential projects. After a plunge in its share value amid the coronavirus outbreak, the travel business is likely to be ejected from the FTSE 100 on Wednesday in the quarterly reshuffle of the index of leading UK company shares.
Copyright © 2020 theguardian.com. All rights reserved.
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