Stock-market futures sink after emergency Fed rate cut – ‘if this doesn’t work, what will?’

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U.S. stock-index futures fell sharply Sunday night following the Federal Reserve’s emergency decision to slash interest rates nearly to zero and buy $700 billion in Treasurys and mortgage-backed securities in an effort to quell financial market turmoil sparked by the global coronavirus pandemic.

Read:Fed, not waiting until meeting, slashes rates to zero and restarts QE See:The Fed just declared its own national emergency as it aims to shield economy from the coronavirus

“The Fed has thrown most its weight behind this move, offering almost everything it has to give, which raises the inevitable question – if this doesn’t work, what will?” said Seema Shah, chief strategist at Principal Global Investors. “The immediate negative reaction suggests markets are already worrying about that, and governments likely need to accelerate their fiscal action.”

Stock-index futures opened sharply lower Sunday night, quickly extending losses to fall the daily 5% limit. Futures on the Dow Jones Industrial Average were 1,042 points lower at 21,798, while S&P 500 futures dropped 128.40 points to 2,555.50.

Treasury prices rose, pushing down yields. The yield on the 10-year Treasury note TMUBMUSD10Y, 0.746% fell 30.5 basis points to 0.644%, FactSet data show.

The U.S. dollar weakened against major rivals after the Fed’s monetary actions. Also, as part of Sunday’s action, the Fed and five other major central banks announced they were activating swap lines in an effort to smooth dollar shortages caused by a global scramble for the currency last week.

Some observers argued that while the Fed’s moves were justified, the timing of the announcement ahead of the open of Asian markets late Sunday and in lieu of a policy meeting that had been sent for this week appeared desperate.

“When you have folks in power acting in a very panicky way, doing off-scheduled meetings and throwing everything they can at the situation, that doesn’t send a very reassuring signal to the general population.” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, in an interview.

Stocks fell sharply in volatile trading last week, with major indexes posting their fastest fall from all-time highs to a bear market – defined as a 20% pullback from a recent peak – on record. Underscoring the volatility, stocks on Thursday witnessed the biggest one-day drop since the October 1987 stock-market crash, then bounced sharply higher Friday for the biggest one-day gain since 2008.

See: These are the dislocations in the U.S. Treasurys market that forced the Fed to ramp up support to Wall Street

Meanwhile, stresses emerged in the Treasury market, prompting the Fed last week to take action to boost liquidity in an effort to ensure smooth functioning. Gyrations in the Treasury market last week saw usual market correlations break down, adding to financial market jitters.

“The New York Fed’s resumption of Treasury purchases late last week were a first step to help alleviate the strains” in the Treasury market. The Fed’s announcement today to buy an additional $500 billion of Treasurys should over time restore the liquidity and the smooth functioning of the Treasury market,” said Joachim Fels, global economic adviser at PIMCO, in a note Sunday night.

Principal’s Shah agreed that liquidity and funding fears that contributed to market tensions last week justified the size and scope of the bond-buying program. “Global central bank coordination to provide dollar funding will be another big tick in the box,” she said.

As the effects of the outbreak unfold across Europe and the U.S., investors are unlikely to find lasting reassurance until uncertainty begins to diminish, analysts said.

“Central banks have played their part in the past few weeks, it is now up to global policy makers, G-7, and or G-20 to step [up] with large scale fiscal measures in the coming weeks and months to complement these measures,” said Michael Hewson, chief market analyst at CMC Markets UK, in a note.