Shell-Shocked Markets Wake to Fed at Zero Amid Dollar Volatility

(Bloomberg) --

If traders hoped Friday’s turnaround would prove more than a moment of relief for the world’s shell-shocked markets, an emergency interest-rate cut by the Federal Reserve and coordinated steps by other central banks failed to bring any lasting sense of stability.

The dollar fell across the board as the U.S. central bank lowered rates to 0%-0.25%, a level last seen in the wake of the 2008 financial crisis. The yen climbed more than 1% and the euro erased losses to add 0.7%. The currency market was the only one active among major markets when the Fed measures were announced. S&P 500 futures tumbled more than 4% as trading began at 6 p.m. in New York, tripping exchange trading curbs, as contracts on Treasuries surged. Rates strategists warned that part of the U.S. yield curve could soon turn negative.

Traders were pricing in another steep rate reduction to address the fallout from coronavirus at the Fed’s March 17-18 meeting but the timing and extent of Sunday’s announcement still came as a shock. Beyond the rate cut, the Fed promised to boost its bond holdings by at least $700 billion and said it would allow banks to borrow from the discount window for as long as 90 days and reduce reserve requirement ratios to 0%.

“It’s pulling Wednesday’s meeting forward -- a rate cut, QE and swap lines to make sure the market plumbing is working sufficiently,” said Mark McCormick, global head of FX strategy at Toronto Dominion Bank. “The knee-jerk is negative for the U.S. dollar given the Fed has now slashed the cost of selling it.”

Fed Chairman Jerome Powell will hold a press conference at 6 p.m. Washington time to discuss the actions. The Fed also united with five counterparts to ensure dollars are available around the world via swap lines, the statement aid.

The options market signaled that currency volatility remains elevated after one of the most turbulent weeks since 2008 amid funding concerns that stoke demand for the greenback.

“The USD should absolutely be sold,” Bipan Rai, North American head of foreign exchange strategy at Canadian Imperial Bank of Commerce, wrote in a message. “The Fed just implemented emergency measures and cut rates to zero while expanding its balance sheet by 16%. That’s a bad concoction for the greenback.”

Earlier, the Reserve Bank of New Zealand set the tone for what promises to be another busy week for monetary policy, cutting its key rate to 0.25% from 1% in an emergency decision in Wellington.

The nation’s currency plunged to its lowest since May 2009 in early trading Monday after the decision, before erasing that loss when the Fed followed with its own unexpected cut. Australia’s currency -- which tends to rise and fall with risk appetite -- swung to a gain after touching its weakest since 2008 and the Norwegian krone bounced back from a fresh record low versus the greenback.

While governments and central banks around the world announce unprecedented economic-stimulus measures -- indicating a growing willingness to coordinate their actions -- economists say virus-triggered closures and national lockdowns are making a global recession all but unavoidable. That means further market gyrations in the week ahead, gains for havens such as U.S. Treasuries, and more nervousness in stocks, commodities and emerging markets.

“While the drop in rates to zero was priced in for the Fed this week, the timing of the rate cut itself has taken many by surprise,” said Simon Harvey, an FX analyst at Monex Europe. “Markets have already bullied the Fed into cutting rates to zero, but the associated liquidity package all in one day dwarfs what was seen after 2008.”

Here are more comments, made before the Fed’s action, on what to expect as markets open Monday:

Andrew Sheets, Morgan Stanley’s chief cross-asset strategist:

• “Global markets are facing their gravest challenge since the Great Recession”
• “COVID-19 will have a dramatic impact on the global economy and has raised the risk of a U.S. and global recession. It is a negative shock to both supply and demand, one that is uniquely difficult for policy makers to ‘fix”’
• “Given the speed and one-way nature of the current sell-off, we think that the probability of a reversal, at least temporarily, has increased”
• “The catalyst, we think, will be market weakness helping to elicit a more aggressive policy response”
• “The start of QE by the Fed, last week’s expansion of QE by the ECB and the Bank of Japan’s acceleration of ETF purchases are starting to look more and more like a coordinated policy response”
• “Strategically, we’ve closed our cautious position in U.S. equities, and are gradually closing a cautious position in U.S. credit.”

James Reeve, the chief economist at Samba Financial Group in Riyadh:

• Recent government measures “are very welcome, and the market is responding positively to them. Whether or not is going to be enough to go beyond and calm financial markets dislocations we have seen in different segments and to lift the economy back into growth, I’m not so sure”
• “There still is an awful large overhang of debt in the U.S. corporate sector, and if high-yield continues to spike, then you have got a problem. Even if high-yield comes back down, it is a consumption-based economy, and people are staying at home, and that is the real worry. Corporate profits are just going to fall”
• The Federal Reserve is right “to target those sectors of the credit market that are distressed. I think most people are expecting a further 50 basis-point cut this week, which is positive”
• “Bond markets will be looking beyond fiscal stimulus and what it means for debt loads.”

Ryan Lemand, the senior executive officer at ADS Investment Solutions Limited in Abu Dhabi:

• “This is the time of central banks and, unfortunately, they lost very, very valuable ammunition over the past few years trying to avoid the recessions”
• “We are still rolling into Chinese assets, where we see bargains”
• “We are also advising clients to look into” assets in the nations of the Gulf Cooperation Council
• “The GCC, in our opinion, has taken the right stance for very strict containment and they are taking commensurate actions from the central banks to go hand in hand with the legacy policies, such as relaxing loans.”

Edward Bell, senior director for market economics at Emirates NBD PJSC in Dubai:

• “At the moment, uncertainty in markets is paramount and the modest rally we saw on Friday for both Brent and WTI, amid a surge in equity prices too, probably reflects positioning more than fundamentals.”
• “As global travel comes as close to an abrupt halt as is seemingly possible and major economies hit the pause button the impact on oil demand going forward will most likely be worse than the IEA’s recent downside risk projections.”

D’Ambrosio, the Malta-based chief executive officer at Axiory Global.

• “In this situation and in absence of further shocks as the coronavirus epidemic unfolds, the stock market might regain some more terrain in the coming week, with bond yields rising, especially in the U.S., and gold possibly further shedding some more of the gains posted earlier this year. Such a scenario might be reinforced by the coronavirus situation in China normalizing, as seems to be the case”
• “The FOMC meeting will be crucial to set the mood for the entire week. As a cut of at least 50 basis points is almost certain, the focus will be on the other measures that will be announced in order to support the financial markets and avoid, or at least limit, the extreme volatility we have experienced last week”
• “A monster $1.5 trillion plan has already been announced and implemented and the result has been the stock market surge on Friday. But still, every word of the Fed chairman statement will be weighed to understand what the Fed outlook and future moves are”
• “The coronavirus impacted on a situation that was already signaling stress, with the slowdown in global demand which started in 2018, along with the trade wars and the stock-market valuations, which have become dependent on external stimulus pumped in by central banks.”

--With assistance from Filipe Pacheco, Michael G. Wilson and Vassilis Karamanis.

To contact the reporters on this story: Susanne Barton in New York at swalker33@bloomberg.net;Jack Pitcher in New York at jpitcher2@bloomberg.net;Justin Carrigan in London at jcarrigan@bloomberg.net

To contact the editors responsible for this story: Jenny Paris at jparis20@bloomberg.net, Rachel Evans

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