Fed Coronavirus Cut Analysis: Sell opportunity on stocks? Sugar rush cannot solve supply problem
|- The Federal Reserve has cut interest rates by 50 basis points in a shock move.
- Markets have leaped on the news that mitigates the coronavirus crisis.
- The mood may turn quickly as the Fed cannot fight the disease.
Shock and awe – the Federal Reserve has cut interest rates by a double-dose of 50 basis points and triggered a stock market rally. The dollar immediately crashed while oil and gold surged.
It is a triple rarity: changing rates by a double-dose, doing it in an emergency move, and hardly providing any guidance.
As Joseph Trevisani said, the Fed prefers being "more safe than sorry." President Donald Trump has been pressuring the Fed, and he is surely pleased – but he may be in for a bitter surprise.
The Fed is indeed doing its part to ease lending conditions and to assist financial markets. However, the central bank does not have the medical tools to stop the outbreak, that goes without saying.
Fed double rate cut - Powell's speech live coverage
Supply side shock
On the economic front, the bank's move helps boost demand – but the shock is a supply one.
Chinese and other authorities are enacting social distancing to stop the contagion of the disease. This includes factory shutdowns – eventually hurting supply. The Fed is unable to open factories or change the dynamic.
Only governments can launch large projects that would boost supply. The White House is not enthusiastic to announce fiscal stimulus – and it is not alone. Germany is also reluctant to change its way of thinking and China is mostly focused on liquidity.
Markets set to fall, gold to continue shining
Shares on Wall Street have already pared some of their gains. Once the sugar rush fades, the patient may have spasms – equities may fall back down.
What about the dollar? The greenback may return to beating commodity currencies and lose to the safe-haven yen. Against the euro and the pound, the battle is more complex. nevertheless, without fiscal stimulus, both currencies may decline.
For gold, the rally may continue as the precious metal enjoys safe-haven flows and also low US rates.
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.