(Reuters) - Hopes that an emergency Fed rate cut would jumpstart battered stock markets were quickly dashed, with Wall Street and Europe closing weaker and gold soaring – who remembers when a 50 basis point cut last had this kind of impact?
In short, the move has backfired – possibly by spooking markets who may be assuming the Fed knew something nasty they weren’t telling, hence the decision to strike preemptively.
The other issue is the futility of it all – as one analyst puts it, lower interest rates can’t help you if you are in bed with coronavirus. Or for that matter, if you have to shut your factory because workers have the virus.
One thing the Fed move did was to cut the dollar’s yield premium against other developed markets – U.S. 10-year yields sank below 1% for the first time, taking the premium over German Bunds to the lowest since 2017, down 30 bps this year. It’s also weighing on the dollar, something the U.S. administration might not be too upset about.
That may not last – the ECB may cut rates next week and the export-reliant euro zone is more exposed to virus economic damage. Euro-dollar scaled $1.12 yesterday, though its now off that as the dollar index rises off 5-month lows. The yen is down 0.4% and the Canadian dollar is awaiting the Bank of Canada meeting that should lower rates to 1.5%.
Meanwhile, Korea shows how it's done -- the government announced a $9.8 billion stimulus package, boosting stocks more than 2% and the won to two-week highs
Still, this morning European shares are a bit firmer and MSCI’s global index is flat after losing 1% yesterday. Chinese stocks are up 0.6%. U.S. equity futures are up a whopping 1.4% -- the catalyst might be Joe Biden strengthening his position in the Democratic primaries after Super Tuesday over leftist Bernie Sanders.
The yuan at six-week highs has regained the losses made since opening from New Year holidays, possibly as the number of new infections in China falls. And the central bank kept short-term interest rates steady, despite the Fed and even as Caixin PMIs showed the services sector had its worst month ever in Feb, almost halving from January levels.
But expect more cuts; with the Fed in a full-blown easing mode, there is no way China can hold off.
In fact all dataflow reinforces the gloom — a Chinese survey showed expectations for the one-year business outlook the gloomiest since 2005. Will U.S. non-manufacturing ISM survey confirms whether services are indeed in contraction, (as PMIs signalled earlier)?
There will also be jobs figures from ADP, the company handling one-fifth of U.S. private payrolls. And Europe releases Feb retail sales and final service-sector PMIs – normally final readings are a non-event but now they could they could be important because of how fast sentiment is changing.
Bond markets have steadied, though the U.S. 10-year yield remains below 1% and it may be a matter of time before German 10-year Bund tests the minus 0.74% record low.
On the equities front, European Q4 earnings are mostly behind us but among trading updates published today is Dialog Semi which expects its chip supply chain to return to normal in Q2 2020.
In the M&A beat: Investment group Exor announced it entered an MoU to sell its 100% stake in reinsurer PartnerRe to France's Covea for $9 billion in cash.
Companies news include a possible boost for Roche as China will use an arthritis drug to treat some coronavirus patients in severe condition and it wins a fast-track review status in the U.S. for a new diagnostic approach for liver cancer.
But possibly grim for Intu which failed to raise capital and for German chemicals group Evonik Industries which sees chemicals sales slowing. Same for Engineering group Andritz which expects a slight increase in sales and a flat EBITA this year. Wizz Air shares has lost ground after cutting flights and further reducing capacity.
Legal & General posted a 12% rise in 2019 operating profit but shares are tanking. Struggling Pandora will cut 180 staff and eliminate an organisational layer in an effort to move closer to consumers.
In emerging markets, South Korean shares gained 2.2% while broader emerging shares rose 0.5%, their third consecutive day of gains and the emerging currency index is up 0.3%
Lebanon’s government is weighing options for the $1.2 billion Eurobond maturing in March.
— A look at the day ahead from EMEA deputy markets editor Sujata Rao. The views expressed are her own —