Global Markets Tank Despite Fed Rate Cuts and QE Measures

  • Global markets plunge despite Fed stimulus plans
  • U.S. markets trip circuit breakers as they fall 7% at open
  • Bank stocks punished as investors worry about liquidity concerns

U.S. markets plunged 7% as the market opened Monday, tripping circuit breakers for the third time in a week as concerns around the impact of the coronavirus grow. This despite the Fed’s biggest single rate cut since the crash of 1987, which the central bank announced Sunday evening. When markets reopened after the required 15 minute delay at the NYSE, indexes fell between 7-9%, erasing hundreds of billions in market value.

Bank stocks were hit particularly hard despite the Fed’s overtures, with consumer banks like Bank of America, Wells Fargo and Citi falling between 8-14% on concerns about the impact of a near certain recession on their balance sheets.

Quantitative Easing and Lending Restrictions Loosened

The Fed launched $700 billion in quantitative easing measures that include $500 billion worth of purchases of U.S. government bonds and $200 billion worth of mortgage-backed securities. It also announced easing of lending standards for banks and access to its discount window at historically low rates should banks need to borrow money to continue operations. The measures are designed to help the U.S. and the global economy snap back from what will certainly be an unprecedented economic slowdown and sharp recession.

“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” said the statement announcing the emergency cut.

But markets did not react positively. European markets were battered with the STOXX Europe 600 index down 9%. Asian markets fell between 2.5-4% as new coronavirus cases throughout the continent are slowing. Australia is not seeing the light as stocks tumbled 9.6%, the biggest one-day drop since 1987’s Black Monday stock market crash. U.S. futures sank.

This shouldn’t surprise us, says economist Tim Duy, because investors are watching for testing, mitigation, and containment of the virus. “The Fed realized this was a ‘go big or go home’ moment, and it rightly decided to ‘go big.’ The Fed basically signaled as clear as it could that it was ready to backstop the financial markets,” he wrote. “The Fed can’t, however, keep the economy from diving into a hole in the second quarter. Market sentiment now is probably going to be driven by the prospects for fiscal stimulus.”

Goldman Lowers GDP to -5% Loss

Goldman Sachs listed some of the different variables at play in its latest note. “Some are medical, including the extent to which social distancing and seasonally high temperatures will reduce infections as well as whether good treatments will emerge. Others are behavioral and economic, including how quickly reduced infections will bring back everyday activities and how effective easier monetary and fiscal policy will be in providing support,” wrote analysts.

The bank has lowered its U.S. GDP growth forecast for Q1 to 0% from its earlier prediction of 0.7%. Q2 forecast has been cut to -5% from 0%. It expects the recovery to begin in April and has raised its estimates for Q3 and Q4 to 3% and 4%, respectively. This all takes its 2020 GDP forecast down to 0.4% from 1.2%. Analysts warned that the uncertainty around these numbers is much higher than normal.

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