“It’s bizarre to have seen, in the space of 60 seconds, five years of (U.S. Federal Reserve) policy rolled out in one fell swoop”
Albert Lu, Sprott | March 18, 2020 | SmallCapPower: Asia and Europe markets fell sharply Monday despite emergency measures by the Federal Reserve to calm investors. Australia stocks dropped almost 10% as investors grappled with the unknown economic impact of the global coronavirus pandemic. The selloff continued through Europe trading, with the broad indexes closing approximately 5% down.
(The following article was originally published on sprottmedia.com on March 16, 2020)
Overnight trading in U.S. equity futures halted after triggering the 5% downward limit.
PANIC EASING
In its latest move, the Fed took the federal funds rate down by 100 basis points, to essentially zero, and included a massive $700 billion quantitative easing program aimed at U.S. Treasury and mortgage backed security purchases.
The Fed also reduced the emergency lending rate at its discount window from 1.5% to 0.25% to deliver greater liquidity to cash-strapped institutions.
The announced moves came only days after the President declared a national state of emergency and the Fed committed to a liquidity campaign of up to $1.5 trillion the week prior, which extended its purchase program of short-term T-bills to a broader range of coupon bearing securities.
Although the moves were aimed to calm markets, some believe the Fed panicked and in turn rattled markets.
“The Fed blasted its monetary bazooka for sure,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group, to CNBC.
“This better work because I don’t know what they have left …”
Danielle DiMartino Booth, founder of Quill Intelligence, told CNBC, “It’s bizarre to have seen, in the space of 60 seconds, five years of policy rolled out in one fell swoop.” Prior to founding Quill Intelligence, DiMartino Booth spent nine years with the Federal Reserve Bank of Dallas, where she advised President Richard W. Fisher throughout the global financial crisis.
“Investors should be wondering if there’s something that the Federal Reserve knows at this juncture that we don’t know. That, I think, is the greatest fear.”
MARKETS SPOOKED
The massive measures helped little as U.S. equities plunged in morning trading. The S&P 500 fell 8.14%, triggering the market “circuit breaker” for the third time in a week.
Treasury yields fell, albeit modestly, in response to the bond-buying program. The 10-year Treasury note dropped 20 basis points to 0.75%. The 30-year Treasury bond dropped 22 basis points to 1.33%.
“To some extent the rate cut and eventual return to QE were anticipated,” said Ian Lyngen, BMO’s head of U.S. rates.
Stocks rose off the lows momentarily before closing the day down near 12%. It was the worst day ever for the NASDAQ and the worst drop for the Dow Jones Industrial Average and S&P 500 since 1987.
SELL-OFF GRIPS GOLD
The global sell-off pushed gold below $1,500 in Monday trading. The move, which took the metal down more than $200 from its peak last week, caused some critics to question its traditional safe-haven role.
Stephen Gallo of BMO Capital Markets blames the fall on a short-term demand for physical cash but sees signs of the flow ebbing.
Brien Lundin, editor of Gold Newsletter, points out the sell-off is evidence of gold performing its function.
“The mere fact that you can break open that piggy bank that gold represents, and get cash when you need it, is really its role. It’s always liquid and that’s what it’s there for.”
OIL MARKET SQUEEZED
The market rout weighed heavily on oil producers as the price decline in oil accelerated. Oil lost 10% as it fell below $29 per barrel on Monday, even after President Trump announced the Department of Energy plan to prop up oil prices through purchases for its strategic petroleum reserve.
The combination of the global economic slowdown and the aggressive production ramp up by Saudi Arabia has squeezed producers from both sides.
WORSE THAN RECESSION
What many wrote off as an exogenous supply shock has evolved into something much more serious.
DiMartino Booth believes the economy is flirting with something that is far “worse than recession.” Furthermore, she believes the standard Fed response won’t be enough.
“What we need to talk about, I think as adults in the room, is preventing something worse than recession in the largest economy in the world.”
“This is very much a financial, fiscal as well as monetary event in the United States.”
As Christopher Whalen, founder of Whalen Global Advisors, explained, the coronavirus is just the catalyst.
“The virus was the catalyst but it’s not the cause.”
“Both bonds and equities were inflated rather dramatically by our friends at the Fed. You’re seeing the end game for monetary policy here, which is at a certain point you have to stop. Otherwise you get grotesque asset bubbles like we saw, and the engine just runs out of fuel.”
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