RBNZ, Fed Make Emergency Cuts

By Michael McCarthy (chief market strategist, CMC Markets and Stockbroking)

The Reserve Bank of New Zealand and the Federal Reserve both cut interest rates to near zero in unusual inter-meeting moves this morning. The Fed also announced a new $700 billion in securities purchases to provide additional liquidity, and arrangements with five other central banks to ensure the global supply of US dollars. The US dollar tumbled in response.

Despite the cuts, early share market reactions are negative. In US Sunday night trading indices are down 4-5%, and NZ shares are around 2.5% lower. Nikkei and Australia 200 futures closed higher on Saturday morning after a global rally that lifted major markets by 10% or more in a single session. However the early response to the central bank moves suggests those gains may evaporate as cash markets come back on line this morning.

Bonds are the beneficiaries of the official responses to the threats posed by the Covid-19 causing virus. After selling off hard on Friday’s stocks rally, Australian ten-year bonds are 9 points lower in yield this morning, and US bond futures are firmly green. Gold is also trading higher this morning.

As governments around the globe ramp up their efforts to contain and minimise the health and economic damage, traders are alert for more central bank responses. While investors may welcome the huge turnaround in stocks on Friday the extreme moves and ongoing higher volatility suggest difficult trading will continue.

CMC’s London based chief market analyst, Michael Hewson, writes on the Fed moves:

22:00GMT Sunday 15th March 2020

Fed goes all in

In a move that caught investors by surprise on Sunday night, the Federal Reserve, along with the European Central Bank, Bank of England, Bank of Japan, SNB and the Bank of Canada threw the kitchen sink at the markets as events over the weekend took further turns for the worst across Europe and the US with respect to the coronavirus.

The US central bank decided they couldn’t wait until Wednesday to announce their latest policy decision when they slashed the Fed Funds rate to 0% to 0.25%, and embarked on a $700bn quantitative easing program. The central bank stated that “the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. The Fed also cut reserve requirements for banks to 0%, while at the same time announcing, in a co-ordinated move with their global peers, that they would enhance US dollar liquidity by way of swap arrangements.

While these moves may go some way to easing any potential blockages in the plumbing of the financial markets, they won’t adequately compensate for the upcoming economic shocks that are about to come our way as a result of the events currently unfolding across Europe, as borders get closed and populations get locked down. Central banks have played their part in the past few weeks. It is now up to global policymakers, G7, and or G20 to step with large scale fiscal measures in the coming weeks and months to complement these measures.

This co-ordinated move by central banks serves to underscore the seriousness of the economic shocks coming our way, however they could well miss their mark unless politicians step up as well, especially in Europe, where the risks are the highest and the financial system is the weakest.

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