16 March 2020

Fed Makes Surprise Move to Keep Economy Buoyant

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What’s happening: US stocks, which are considered a barometer of the economy’s health, delivered a rollercoaster ride last week. Although the US stock market ended Friday’s trading in positive territory, concerns remain around the coronavirus pandemic sending the world’s largest economy into a recession.

What happened: US stocks surged on Friday amid continued volatility. The sharp rebound in US indices came after the stocks suffered their biggest one-day decline since the 1987 market crash. US stocks also registered their strongest daily gains since 2008 on Friday, after President Donald Trump’s emergency announcement released access to $50 billion to help stop coronavirus from spreading.

In a surprise move, the Federal Reserve announced aggressive measures on Sunday in a bid to save the US economy from a coronavirus fallout.

Why it matters: President Trump announced plans to increase testing facilities and expand the ability of hospitals to provide treatments for coronavirus. Roche received clearance from the FDA for the emergency use of its coronavirus diagnostic tests. The agency announced the approval of the test kits within a day of receiving the application request. The automated test is projected to significantly increase the testing capability in the US.

On Friday, Treasury Secretary Steven Terner Mnuchin also disclosed that the White House and Congress were close to finalizing a stimulus deal. The Bank of Canada cut its benchmark rates by 50 basis points to 0.75%.

The Dow, which had plummeted over 2,300 points on Thursday, surged 1,985 points to close at 23,186 on Friday. The S&P 500 index gained 9.3%, while the Nasdaq 100 spiked 9.4%.

Sunday surprise: In an emergency move on Sunday, the Federal Reserve announced a massive 100 basis point reduction to its benchmark interest rate, bringing it down to zero. The Fed also launched a new round of quantitative easing (QE) worth $700 billion. The QE proposal allows in the government to make asset purchases in the Treasury and mortgage-backed securities, to shield the economy from the effects of the virus.

The new fed funds rate was cut from a range of 1% to 1.25% to a target of 0% to 0.25%. The Fed also slashed the rate of emergency lending to banks by 125 basis points to 0.25% and increased the term of loans to 90 days.

Despite these moves, US stock futures plummeted immediately after the opening bell on Sunday night and trading had to be halted.

What to watch: Market volatility is likely to continue, as investors look for signs of progress with the recently announced QE plan and news of the coronavirus spreading.

COVID-19, which has been declared as a pandemic by WHO, has affected over 169,000 people worldwide and claimed 6,500 lives. US has reported around 3,700 cases so far, with 69 deaths. While Italy is reporting a rise in daily cases, the cases in China have been declining.

Safe haven assets, like gold and oil, have also been on a downward momentum. Oil futures recorded a whopping 23% decline last week, while gold futures were down 9%.

US stock futures are pointing towards a lower open today. Moreover, the economic calendar for the day is light, with the New York Empire State manufacturing index due for release later today. The index, which spiked to 12.9 in February, is expected to fall to a reading of 4.4 in March.

The Markets Today

     

The Canadian dollar will be in focus today, with the currency gaining against its major rivals after the Bank of Canada surprised markets with a second rate cut.

Context: The Canadian dollar climbed against the greenback and the pound on Friday, with the Bank of Canada cutting its cash rate by an additional 50 basis points to 0.75%, following a devastating week for oil. Prices of crude oil, which is a major export for Canada, declined by 23% last week.

Details: The Bank of Canada announced plans on Thursday to provide billions of dollars in liquidity to the economy to ensure smooth functionality of the markets amid rising coronavirus fears. The back had lowered its interest rates by 50 basis points last week. Announcing the next rate cut, the Bank of Canada said, “This unscheduled rate decision is a proactive measure taken in light of the negative shocks to Canada’s economy arising from the COVID-19 pandemic and the recent sharp drop in oil prices.”

The country’s Prime Minister Justin Trudeau went into self-isolation after his wife was confirmed positive for COVID-19. Canada advised its citizens to avoid non-essential foreign trips and said it has plans to provide “significant” financial help. The details of this are scheduled to be presented by Finance Minister Bill Morneau today.

The Loonie, which had fallen sharply against the greenback this month, rebounded from a 4-year low level on Friday. The Canadian dollar reached 1.3890 versus the greenback on Friday and the USD/CAD pair was trading at 1.374 at 10:20am GMT.

Why it matters: The Canadian dollar is likely to remain volatile during today’s session with the central bank’s surprise rate cut and the unscheduled rate cut by the US Federal Reserve on Sunday.

What to watch: Markets will be keeping a close eye on oil prices, as this has a meaningful impact on Canada’s balance of trade. Investors will also be looking at news related to the global economy and updated on the spread of coronavirus. The economic calendar for both Canada and the US is very light today.

Other Market: Most European indices were trading lower at 10:30am GMT, with the FTSE 100, German 30 and French 40 down 6.99%, 8.09% and 8.86%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

Brazil’s net payrolls, Canada’s new motor vehicle sales as well as the US NY Empire State manufacturing index.

 

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