Fed Cuts Rates to Zero and Markets Tumble
Global markets are continuing to tumble at the start of the week following another dramatic intervention from the Federal Reserve. US stock futures hit their lower limit prior to the first market open of the week. Finally Goldman Sachs has stated the US markets have further to fall.
The Fed on Sunday cut rates a full percentage and is now close to zero at the emergency meeting. They have also begun QE with $700 billion worth of treasury bonds and mortgage-backed securities.
This measure would usually reassure investors that Central Banks will provide support but the action has instead convinced investors of a financial shock with a severe economic condition due to the Coronavirus is due.
It’s clear all major central banks have already implemented all available tools to prevent a crisis, it seems the fear of the Covid-19 pandemic is only getting further out of control and will require more than monetary and fiscal stimulus to bring an optimistic sentiment.
Goldman Sachs has told their clients, due to the current environment it will be tricky to identify a floor and to expect US markets to continue to fall. As the US’s travel ban to the Eurozone now includes the UK, the airline sector has been the worst hit as citizens of major economies are instructed to remain in their homes.
Cryptocurrencies were seen as a safe haven asset, but actually there has been a strong correlation with risk. Bitcoin has lost a value of up to 40% and Ethereum is plunging 44%. Precious metals followed the same path and both gold and silver have declined.
An explanation for this is that both asset classes have become the first to be liquidated, firstly in order to fund margin calls and losing positions and secondly, as they say cash is king investors would increase cash holdings in times of a pandemic.
The week ahead is definitely going to be as lively and volatile as the previous one. The Covid-19 outbreak continues, as we enter a critical week for Europe and the US. Economic data are no longer driving markets, but it’s worth mentioning that we have interest rate decisions from the US and Switzerland even after recent emergency cuts, and CPI / Retail Sales numbers as well.
Be safe and good luck with the week ahead.