Markets are not sticking to the post-crisis script in these febrile times

Equity markets are supposed to rally when you cut rates. But markets are not sticking to the post-crisis script in these febrile times.

The Federal Reserve cut interest rates by 50 bps yesterday, its first emergency cut since 2008. But it had the exact opposite effect intended as equities sold off through the US session. Bond yields plunged further, with US 10-yr yields dropping under 1% for the first time and hitting as low as 0.9060% overnight. Bonds are driving equities and the emergency cut only seemed to make things worse. 

The Dow Jones fell nearly 800 points, handing back much of Monday’s record rally. The SP 500 and Nasdaq both fell by close to 3% on the day. Stocks had initially jumped on news of the cut, but a press conference in which Fed chair Jay Powell indicated limited appetite to ‘do whatever it takes’ left the market hanging. Earlier in the day the G7 had issued exactly the kind of underwhelming statement that we’d anticipated. But the Fed at least was decisive and to be fair, it delivered its message well ahead of the cut announcement- it was the expectation of action that drove Monday’s rally

The FTSE 100 was in a narrow range on the open on Wednesday around 6725, posting very modest gains amid a broadly flat session on the continent as European markets continue to prefer to wait for the US for direction.

But the Fed will not be happy and it only puts even more pressure on the next meeting - the market expects at least another 25bps of cuts this month. The post-cut sell-off also simply highlights that there’s not a hell of a lot central banks can do alone. The cut should not have come alone, it should have been announced as a package of wider measures. The Fed will hope that this epic bond rally and market collapse in yields eases, allowing its cuts to have some effect.

So will there be a wider response? The Fed is kind of out a limb here, using its ammo early. It has made this instant monetary move, so the market is going to be looking at whether the ECB in particular feels the need to move too. You could see the dominoes fall now and I think the ECB will need to follow with 10bps of cuts probably before the next scheduled meeting. The Bank of England can probably afford to wait until its scheduled meeting later this month. The Fed will take the usual flak for saying on the one hand that the economy is sound but aggressively cutting rates simply because financial markets are out of kilter for a bit. Meanwhile the World Bank announced $12bn to boost developing countries’ virus response. Hong Kong followed the Fed with a 50bps cut.

Elsewhere, Joe Biden’s Super Tuesday wins left him in a much stronger position. Bernie Sanders took the big prize of California, but the resurgence for the moderate Biden helped lift market sentiment, sending futures higher.

Overnight, Asia struggled for direction as the shocking data keeps piling up. Hong Kong’s PMI slumped to an all-time low amid the coronavirus shutdown. China’s Caixin General Services PMI saw a record drop in business activity. China February car sales fell 80%. This is what a coronavirus slowdown looks like.

In FX, the euro pulled back from an 8-week high as US yields bounced off those all-time lows. Eurozone inflation eased to 1.2% as expected, but it was the Fed that drive price action. EURUSD slipped back to the comfort zone at 1.1150 having touched 1.12 earlier.

Gold has made some more sustained gains as yields collapse, spiking above $1650/oz before easing back to trade around $1635. The 200-hour moving average is offering near-term support around the $1633 level. However yesterday’s peak fell short of the Feb 27th swing high and the MACD hourly is also looking near-term bearish with a crossover. Oil – market is expecting deeper cuts ahead of the stripped-back meeting in Vienna, which starts tomorrow. Having tapped on $48.60 yesterday WTI is doing little above $47 now.

Equities

TUI and Kingfisher look like being booted out of the FTSE 100 in the latest reshuffle along with the calamitous NMC Health. The coronavirus has hit TUI’s market cap along with the rest of travel & leisure but it's also faced considerable headwinds from the grounding of the Boeing 737 Max, and faces longer-term structural challenges in packaged holidays. Kingfisher has been a mess for some time and it’s a surprise it’s taken this long. Retail is an ever-decreasing portion of the blue chip index. WM Morrison is only just clinging on.

Talking of retail woes, Intu says it will halt its equity raising. This casts doubt on the future of the business. Management simply says that following discussions with shareholders and potential new investors the company has ‘concluded it is unable to proceed with an equity raise at this point’. No one wants a piece of shopping malls – no real surprise, the current financial market conditions are hardly helpful either. Wrong business, wrong time.