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Wha you need to know on Wednesday 4th:
Responding to the stock market route as a consequence of the coronavirus fear which has sent US benchmarks into official correction territories, the Federal Reserve, despite their dual mandate which does not include Wall Street's stocks, responded in kind with an emergency 50 basis point rate cut and left the door open for more. The inter-meeting cut was the first since 2008.
As a result, there was a spike of volatility in commodity and financial markets. The VIX rallied between 24.90-41.1 and the S&P 500 ranged between 2976.63-3136.72 before shedding gains for a low of 87 points or -2.81% on the day.
We had been given the heads up by a top economist for the US bank lobby - a former Fed insider - who had issued a remarkably specific prediction on Sunday that the rescue was nigh. In a blog titled "Don't keep your powder dry" here, Bill Nelson, chief economist at the Bank Policy Institute who worked on the Fed's responses to the 2007-2008 financial crisis, predicted, "a coordinated global interest rate cut by the top central banks, such as the one executed at the height of the crisis in October 2008 by the Fed and five other central banks. They will possibly include in this action the People's Bank of China and the Hong Kong Monetary Authority, the two banks whose economies have so far suffered most from the outbreak.
FXStreet reported on this, preparing traders for such an eventuality, here: US bank lobby economist predicts global rate cut coming ... this Wednesday – Reuters
However, what was surprising was that the G7 communique, basically was an all-talk affair, no walk. It would appear central banks will work on their own and decide what is best for their domestic economic needs, in accordance with the populist policies of recent years. So, a coordinated effort has not played out as according to the prediction although we will expect to see more from central bankers in due course - Bank of Canada is up next. However, the days of bazookers are long gone and that is a concern in the markets – central banks have little ammunition left and are calling on debt ladened governments to add fiscal stimulus.
The CRB index rallied on dollar weakness, with the DXY falling below the 97 handle and signs of reflation on the way. However, the uncertainties and drastic emergency measures spooked the base metals, with both copper and nickel down. The Fed’s move is likely to reinvigorate demand for gold. Oil prices rose to fresh intraday highs as the OPEC+ monitoring committee gather to discuss production cuts although gave back the gains to finish -0.8% in the red, WTI.
Meanwhile, the US 2-year treasury yields fell from 0.90% to 0.62% then 0.70%, the 10-year yield from 1.17% to 0.90% - a fresh record low – before steadying around 1.00%. "Despite the inter-meeting rate cut, markets are pricing a 50% chance of 25bp cut at the next FOMC meeting on 18 March, and a terminal rate of 0.50% (vs Fed’s mid-rate at 1.13% currently)," analysts at Westpac explained.
Following the Reserve Bank of Australia's rate cut yesterday, Australia’s quarterly national accounts which are due at 11:30am Syd/8:30am Sing/HK will be of particular interest, as will hina’s February Caixin Services PMI 12:45pm Syd/9:45am local.