- The Federal Reserve has limited tools to mitigate financial fears
- Chinese figures published over the weekend are devastating and may trigger further plunges
- The first US death from coronavirus and the ongoing spread add to concerns
Acting as appropriate – as Jerome Powell, Chairman of the Federal Reserve put it – may be far from sufficient. Perhaps the Fed is unable to do anything at this point to stop the crash in global markets in the wake of the worsening coronavirus outbreak.
Powell took the extraordinary step –unseen since the crisis – to issue an unscheduled statement late on Friday. He said the US economy is in a good state but the bank is monitoring the epidemic and ready to act – a code word that the world's most powerful central bank will cut rates in its upcoming meeting. Some even suspect the Fed could slash borrowing costs in an emergency session ahead of its planned March 18 gathering.
The news helped American equities bounce late on Friday after a horrendous week. However, here are three reasons why shares are likely to tumble down as trading kicks off in March.
1) The Fed had limited power
Powell has already reduced rates three times in 2019 – and not from a high point. The current Federal Funds Rate is at a range between 1.50% to 1.75%. While the Washington-based institution had more firepower than its peers in developed economies, its ammunition is in limited supply.
Moreover, this is a health crisis, not a financial one like in 2008. The Fed has monetary tools but does not have the available medicine. Any financial shot in the arm would only slow the sell-off, but not turn the trend back up.
2) China's economy has ground to a halt
The comparison to the Great Financial Crisis is ominous for the Chinese economy. According to Purchasing Managers' Indexes for February, both the manufacturing and the services sectors are collapsing more quickly than in 2008 – and these are official, government figures, often suspected for smoothing reality.
Manufacturing PMI hit 35.7 points, far below around 45 expected, and services fell to 29.1, miles away from around 51 projected. That, on its own, does not bode well for the open in Asia.
3) Coronavirus is spreading, the first death in the US
The illness continues making its way around the world also over the weekend. Washington state has confirmed the disease's first coronavirus-related mortality in America. As authorities ramp up testing, more cases are likely in the world's largest economy.
It is likely only a matter of time until the first infection is reported in New York, where the main stock markets are based. Attempts to stop the spread, such as cancelation of events and other means of social distancing may also raise fears of broad economic damage.
Conclusion
The Fed's outstanding effort to halt the carnage in markets is bound to fail amid its inherent inability, Chinese data, and the ongoing spread of coronavirus.
Gold, the Japanese yen, and bonds are set to benefit from safe-haven flows
See March Madness: 5 critical (mostly) coronavirus-linked events to rock markets in the first week of March
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
AUD/USD holds above 0.6500 in thin trading
The Australian Dollar managed to recover ground against its American rival after AUD/USD fell to 0.6484. The upbeat tone of Wall Street underpinned the Aussie despite broad US Dollar strength and tepid Australian data.
EUR/USD comfortable below 1.0800 lower lows at sight
The EUR/USD pair lost ground on Thursday and settled near a fresh March low of 1.0774. Strong US data and hawkish Fed speakers comments lead the way ahead of the release of the US PCE Price Index on Friday.
Gold price finishes Thursday’s session set to reach new all-time highs
Gold price rallied during the North American session on Thursday and hit a new all-time high of $2,225 in the mid-North American session. Precious metal prices are trending higher even though US Treasury yields are advancing, underpinning the Greenback.
Bitcoin price extends retreat from $69K as old whales shift their holdings to new whales
Bitcoin price continues to move further away from the $69,000 threshold, gaining ground as BTC bulls hope for a retest of the $73,777 peak. This is because of the general assumption that clearing this blockade would set the tone for a reach higher, marking a new all-time high.
Bears have been standing before a steamroller so far this year
Despite a pushback on rate cuts from Christopher Waller, and what was supposed to be cautious trading sentiment ahead of critical US inflation data released later on Friday, the S&P 500 rose on Thursday, marking its best first-quarter performance in five years.