Once again the Federal Reserve’s unscheduled attempt to boost market sentiment back-fired, investors greeting the central bank’s latest intervention by reversing last Friday’s rebound and then some.
On Sunday night Jerome Powell, much to the delight of his adversary – and boss – Donald Trump, announced a massive 100 basis points cut to the Fed’s interest rates, taking them to 0-0.25%. Remember, only a few weeks ago they were sitting pretty at 1.5-1.75%. This came alongside the announcement of a $700 billion quantitative easing package designed to purchase Treasury-bonds and mortgage-backed securities.
Fearing the Fed’s dwindling arsenal – the next step may well be negative rates, something Powell said wasn’t an ‘appropriate’ policy for the US economy – investors failed to take an iota of reassurance from Sunday’s actions. Just like its initial rate cut, or last week’s $1.5 trillion injection, the central bank’s decisions have been consistently poorly received by the markets.
It would be unfair, however, to pin Monday’s losses solely on the Fed. The markets are also dealing with some numbers out of China scary enough to start a horror film franchise. Analysts had been expecting a 3.0% fall in industrial production, a 2.0% drop in fixed asset investment and a 4.0% contraction in retail sales. Instead the readings came in at -13.5%, -24.5% and -20.5% respectively. One could argue those numbers aren’t exactly surprising, and that the estimates always looked a bit suspect. However, that failed to curb the blow for investors.
Combine that with a weekend full of lockdown headlines, uncertainty in the UK, and news that there are now more cases outside China than in, and it was another toxic cocktail for the markets to swallow at the open.
The FTSE lost 4.7% after the bell, returning the index to 5070 for the first time since October 2011. The DAX, meanwhile, shed another 500 points to sink under 8700, with the CAC plunging 6% following the latest updates suggesting France is struggling to control the rise in new cases. That French decline was echoed by the IBEX, which suffered a 6.5% slump following the Spanish lockdown.
Realistically, the only part of the European session that matters is that which overlaps with the US. So the region’s indices will take no comfort from the fact the Dow Jones is expected to lose at least 5% when the bell rings on Wall Street, wiping out around half of last Friday’s late rally to send the index back below 22000.
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