Opening Bell: Surprise Fed Rate Cut Sends Equities, Futures Lower; Yields Drop

Key Events

Despite Friday's wildly bullish equity rebound, the start of trade this week began with a vicious selloff that signaled more sharp declines are likely on the way. U.S. futures for the S&P 500, Dow Jones and NASDAQ all dropped around 5% this morning after last night's emergency Fed rate cut, which also included a gargantuan package of measures meant to ease the economic fallout from cratering markets alongside the impact of the global coronavirus pandemic. 

The central bank move, instead of acting as a balm to worried investors, sent Asian markets and U.S. contracts plunging, hitting futures limits and halting trade. The Fed also introduced a huge, $700 billion bond purchasing plan, which guaranteed demand for Treasurys, thereby stifling any remaining appetite for equities.

Investors rapidly shifted into Treasurys, driving yields lower.

Global Financial Affairs

Last night's surprise cut, the second this month, saw the Fed slash interest rates by a full percentage point to near-zero. It's the first time since the 2008 financial crisis that rates have been this low; they remained at this point until December 2015. 

UST 10Y 60 Minute Chart

Yields, including for the benchmark 10-year Treasury, fell as much as 30 points. The benchmark note had been trading according to a H&S pattern, having formed the left shoulder and head. The broken uptrend line since March 9 is a presumed resistance, forming conditions ripe for a right shoulder. A downside breakout would signal a return to the March 9 lows of 0.318.

The STOXX Europe 600 tumbled to 2012 lows, falling for seven of the last eight days.

Asian indices all dropped into the red with Australia’s ASX 200 carving out a 9.7% loss. Japan’s Nikkei 225 outperformed, (-2.46%).

SPX Daily

U.S. stocks surged on Friday, with the biggest daily gains since 2008, after U.S. President Donald Trump promised to provide market stimulus. Friday's activity occurred after U.S. markets experienced their worst day since 1987. Though the S&P 500 leaped more than 9% ahead of the weekend, overall it was still the worst week for the benchmark index since the financial crisis.

It would appear counter-intuitive that the president’s promise of stimulus last week was greeted by the biggest market jump in over a decade, while the actual act of easing by the Fed has today triggered a selloff so rapid and deep that trading limits stopped out futures markets. One major difference: Trump’s policy promise didn't include purchasing bonds, which diverted demand away from stocks. Another difference: any stimulus that spurs consumer spending boosts GDP, whereas cutting interest rates and purchasing bonds by the Fed doesn't have that affect.

As well, during times of market panic, the collective investor acts irrationally, making it difficult to predict reactions in the shorter term. Plus, the Fed can do little to buoy confidence when big retailers such as Nike (NYSE:NKE) and Apple (NASDAQ:AAPL) announce they’re closing their chains till the coronavirus is contained. Finally, Fed Chair Powell warned of a weak quarter.

The dollar fell as traders priced in the near-zero rates and QE.

DXY Weekly 2018-2020

Technically, the USD is back within a rising channel, though it may be developing a bearish broadening pattern. However, if stocks crash, as we expect, the dollar, as the ultimate safe haven asset, is almost certain to surge, something it did after both the 2000 and the 2008 equity market crashes.

The yen rebounded from Friday’s plunge after the Fed, as well as five other global central banks, said they would deploy foreign-exchange swap lines. Even after the Reserve Bank of Australia said it was ready to buy bonds for the first time, Australian equities dived almost 10%, the most since 1992. The announcement also sent yields tumbling.

New Zealand’s currency slumped after the RBNZ's rate cut.

Neither oil nor gold reacted positively to the Fed's Sunday night moves.

Oil Daily

Oil gave up gains and fell into decline, struggling against the possible bottom of a bearish pennant. 

Up Ahead

• The RBA Meeting Minutes will be released at 20:30 EDT, Monday. Investors will be listening for details on the Australian central bank's policy measures, that spurred the biggest local equity market selloff since 1992.
• U.S. core and headline retail sales for February will be announced Tuesday. A slight decline is expected though markets will be eager to learn whether Covid-19 has already impacted the data.
• On Wednesday morning the Eurozone will release CPI metrics, which are forecast to remain steady.
• Also, on Wednesday, the U.S. weekly crude inventories are printed, perhaps the most volatile asset amid this crisis.

Market Moves

Stocks

• The Stoxx Europe 600 Index declined 4.5%.
• Futures on the S&P 500 Index sank 4.8%.
• The U.K.’s FTSE 100 fell 4.6%.
• The MSCI Emerging Markets Index dipped 4.1%.
• The MSCI Asia Pacific Index decreased 3.9%.

Currencies

• The Dollar Index dipped 0.2%.
• The euro gained 0.7% to $1.1182.
• The British pound increased 0.4% to $1.2332.
• The Japanese yen strengthened 0.9% to 106.66 per dollar.

Bonds

• The yield on 2-year Treasuries sank 18 basis points to 0.31%.
• The yield on 10-year Treasuries declined 21 basis points to 0.75%.
• The yield on 30-year Treasuries declined 11 basis points to 1.42%.
• Germany’s 10-year yield dipped three basis points to -0.57%.
• Britain’s 10-year yield decreased two basis points to 0.395%.

Commodities

• West Texas Intermediate crude declined 3.1% to $30.75 a barrel.
• Gold strengthened 0.1% to $1,532.05 an ounce.
• Iron ore climbed 0.1% to $88.40 per metric ton.