MARKET REVIEW. The American central bank (Fed) troubled the markets on Tuesday by announcing a surprise rate cut intended to mitigate the economic impact of the coronavirus, a decision initially welcomed by investors before doubt sets in and plunges Wall Street .
The context
The New York Stock Exchange‘s flagship index, the Dow Jones Industrial Average, fell 2.94% while the tech-heavy Nasdaq plunged 2.99% and the S&P 500, which represents the 500 largest companies on Wall Street, lost 2.81%.
A sign of the anxiety of brokers, they have flocked to financial products considered to be safe havens, such as United States debt: reflecting strong demand, the country’s 10-year borrowing rate has increased. for the first time below the symbolic threshold of 1%.
“The rate cut urgently decided by the Fed was supposed to strengthen confidence”, but it rather rekindled the fear “that the coronavirus is likely to cause a major economic slowdown”, estimates economist Joel Naroff.
However, market players initially welcomed the central bank’s decision to lower rates by 0.5 percentage point.
The European stock markets thus ended up sharply, after their spectacular correction last week: Paris gained 1.12%, Frankfurt 1.08%, London 0.95%, Madrid 0.80%, Milan 0.43 %, Amsterdam 1.48% and Brussels 1.47%.
Wall Street, after having soared at the time of the Fed’s announcement, however quickly became disillusioned.
His clues began to sink into the red when the president of the US central bank, Jerome Powell, spoke at a press conference clock in and out app to justify the decision of his institution.
The latter admitted that uncertainty remained about the duration and scale of the epidemic, fueling the fears of Wall Street investors.
If the latter had bet on a boost from the Fed, they rather expected it to act at its next meeting on March 17 and 18.
They were all the more surprised that no concrete announcements had come out of a telephone meeting earlier Tuesday of G7 finance ministers and central bankers. The latter had simply promised to use “all the instruments” necessary to support a world economy paralyzed by the new coronavirus.
US President Donald Trump said again on Tuesday that the Fed had to go even further.
But quickly several analysts wondered about the real impact of the sudden intervention of the institution.
Effective?
To the question of whether the drop in rates will “offset the weakening demand generated by the coronavirus, the answer is probably no,” said Karl Haeling from LBBW. “If you don’t want to take a business trip or go to a concert, the fact that the Fed cuts rates probably won’t change your decision, which is based on your fear of the virus. “
For Peter Cardillo of Spartan Capital Securities, the Fed’s action can even “send the wrong message” to the markets because it seems on the one hand to respond more to political pressures from Donald Trump than to a real economic need, and it gives on the other hand, the impression that the Fed is “using all its ammunition”.
However, for the markets, it is urgent to get the machine back on track. The OECD on Monday reduced its growth forecast from 2.9 to 2.4%, and warned that the global economy could experience a recession in the first quarter because of the Covid-19 epidemic, whose toll exceeds 3,100 dead with 78 countries affected worldwide.
The US rate cut, which was decided upon as a matter of urgency in the midst of the financial crisis in 2008 “had not stopped the markets from falling, it was rather the opposite, it had even accelerated it because the rate cut was a dangerous situation”, recalled Alexandre Baradez, analyst at IG France.
However, “while no one believes central banks can solve the crisis, they can help indebted companies weather the storm and avoid tighter funding conditions,” said Neil Wilson, analyst for markets.com.