It was the continued spread of the coronavirus that prompted yesterday’s unscheduled conference call between Finance Ministers and central bankers of the world’s largest nations. They pledged to do whatever it takes to support the global economy. Unfortunately for markets, however, only the US did anything. By the early afternoon, the US Federal Reserve had delivered perhaps the most significant shock to the global economy since the 2008 financial crisis, by cutting benchmark interest rates by 50 basis points. What’s more shocking was the total lack of joint action from other global central banks and a void of fiscal pledges by major governments, including the US. Hence, the positive reaction lasted mere minutes before equities continued selling off, bond yields moved lower, and investors boycotted anything remotely risky.
The combination of an absent market correction and deepening rate cut expectations suggest two things: the policy measure is ineffective and, given the lack of other support, inevitable. Chairman Jerome Powell admitted that the Fed’s decision would provide limited buffer in supporting demand, recognising that the problem of broken supply chains or increased rate of infection could not be solved by central banks. Certainly, the next step in a comprehensive plan to stabilise growth conditions will need to be coordinated action from global governments and central banks. The Fed alone can’t produce miracles…
Bottom line: So, where’s the silver lining? The Fed’s move has opened the door for the Peoples’ Bank Of China to ramp up fiscal and monetary stimulus without huge capital outflows or weakening the Yuan, and this could well help get China back on its feet. Clearly, the risk then becomes a renewed spread of the virus as factory and manufacturing staff return to work en-masse.
The Fed’s surprise rate cut yesterday had little enduring effect on the Dollar. The instantaneous shuffle in rates was pronounced, but the trade-weighted Dollar remains firmly lodged atop the compressed 50-day and 100-day moving averages. Today’s ADP Employment Change data for February, which is expected to be less robust than January’s figure, is unlikely to affect the Greenback, which remains stuck in cross currents of changeable sentiment.
Despite this morning’s release of resilient EU Services Purchasing Managers’ Index data points, the common currency seems to have lost its momentum when it touched the 200-day moving average. The motivation for EUR appreciation is ascribed to a repatriation of funds by reducing investments abroad. Consequently, the rationale for further appreciation hinges up further weakness resulting from coronavirus headlines, though the marginal benefit of repatriating back into a markedly stronger Euro represents a large disincentive.
Since both the Dollar and Euro have moved in opposing directions and halted on balance, some pullback seems more likely than a resumption of that trend. The reason for this, is that one needs an ever-larger rationale to reduce risk when the cost of doing so mounts. In the wake of the Fed’s move, a re-tabulation of other central banks reactions is under way, particularly this week’s European Central Bank meeting.