- Global stocks plunged on Monday morning, despite a decision from the Federal Reserve to cut rates by 100 basis points on Sunday night.
- Markets seem to be ignoring the global coordinated response from central banks as sell-off deepens.
- On Sunday night, the Fed slashed its benchmark interest rate by 100 basis points to near zero. The Fed’s key rate is now 0% to 0.25%, matching the record low it was last at in 2015. The Fed also announced it will increase its bond holding by $700 billion.
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Markets across the world are plunging, despite the massive stimulus package announced by the U.S. Federal Reserve on Sunday night.
On Sunday night, the Fed slashed its benchmark interest rate by 100 basis points to near zero. The Fed’s key rate is now 0% to 0.25%, matching the record low it last occupied in 2015. The Fed also announced it will increase its bond holding by $700 billion.
The move from the Fed is part of a global response from central banks meant to curb growing economic uncertainty caused by the coronavirus pandemic.
However, financial markets across don’t seem impressed by the level of stimulus being pumped into the economy by central banks.
“Make no mistake, what the Federal Reserve did last night was remarkable, but the global economy is grinding to a halt – no amount of central bank liquidity can contend with that,” Neil Wilson, chief markets analyst at Markets.com said in a note Monday morning.
“Markets are pricing for 2020 earnings to tumble and for a global recession. The kind of damage will be lasting in many sectors, far longer lasting than the virus outbreak itself,” Wilson said.
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US futures plummeted on Sunday evening after the Fed announcement, triggering emergency measures to implement a price floor and stop steep losses. In Europe, stocks plunged on Monday, with the pan-European Stoxx 600 down 8% at the start of trading. Stocks in Asia tumbled as well with the Australian stock index down nearly 10% at the end of the trading session.
The negative reaction from markets shows the lack of confidence that traders have with central bank’s actions in the current market environment. It also means that investors are starting to think that central banks are running out of ammunition.
It also shows that investors expect more than just monetary policy to tackle the growing coronavirus pandemic.
While a number of governments have announced fiscal stimulus, the general expectation is for a bigger and coordinated response from governments.
Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, in a morning note titled “Biz Bazookas Everywhere,” said that central banks around the world have deployed huge amount of monetary weapons. However, he said, critical industries such as tourism and air transport find themselves “at the edge of the cliff.”
Governments around the world will now have to decide whether to pump in additional stimulus to save these industries or let some of them collapse, Halley said.
Meanwhile, a number of analysts expect the financial market sell-off to continue till the uncertainty of the virus eases off.
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“Until we see an end in sight for the virus and the number of infections globally peak, markets are going to be extremely volatile, and it’s likely going to get worse before it gets better, so investors must brace themselves in the near term,” according to a morning note from Adrian Lowcock, head of personal investing at investment platform Willis Owen.
“However, once the infection rate peaks and the world gets back to some semblance of normality, markets could snap back as fast as they fell. Trying to time this is impossible, so investors must try to ride out this crisis as best they can without giving in to fear,” Wilson said.
Last week the Bank of England cut its benchmark interest rate by 50 basis points and the government launched a £30 billion fiscal stimulus package.
Meanwhile, the European Central Bank (ECB) launched an additional quantitative easing, or bond-buying, package of 120 billion euros. This on top of its 20 billion euros asset purchase.
“The Fed and other Central Banks have now used the majority of the monetary policy stimulus available to them and now the onus is on the government to implement fiscal measures in order to stem the economic damage from the coronavirus outbreak,” Adam Vettese, an analyst at multi-asset investment platform eToro said in a morning note.