Author Rowan Murphy
The situation is global markets currently is totally wild. The core issue is the coronavirus and where in the world is grinding to an economic halt now and who’s expected to next. Adding to this is what emergency measures policymakers are taking to support economies through these dire times, enter the RBNZ this morning taking an axe to their rate, out of cycle. Signs of stress on the financial system appear almost palpable and are extraordinarily reminiscent of the GFC, of course volatility remains very high.
Friday’s trade saw a taste of both big falls and big rallies. The ASX200 fell by as much as 8% during its session, only to rally by 15% into the close – reportedly in part due the RBA’s liquidity injection into financial markets. On Wall Street, the story was similar with the S&P500 rallying 8.7%, mostly in the last half an hour of trade, after US President Donald Trump announced a massive new emergency response plan.
From a fundamental economic point of view, the top concern right now is a US recession. The markets seemed to welcome the Trump administration’s new package to combat that risk. It declared the coronavirus outbreak a national emergency, and promised a range of measures, including freezing interest on student debt, and providing free tests. The package also announced the US Government would be increasing its strategic oil reserves, to support the oil price and US shale producers though the Russian Saudi oil price war.
The US Government’s response was just one among a handful of emergency measures taken by global policymakers to support the economy through the coronavirus outbreak. The Bank of Canada announced an emergency interest rate cut of 50 bps on Friday to bolster Canada’s financial system. And this morning, the Reserve Bank of New Zealand cut rates by 75 bps, to 0.25% and pledged to keep rates at these levels for the extent of 12 months.
The Fed has announced this morning that it’s slashing rates to 0 to 0.25% and pledged to increase its bond purchases to $US500b, and its purchases of Mortgage Backed Securities by $200b, in an crisis-level move to support global financial conditions.
Early moves in the FX market has seen the Japanese Yen spike, and the USD tumble. The Australian Dollar has swung in a 2 per cent range, dragged down by the RBNZ move, then pushed higher by the Fed decision, to briefly trade at its lowest level since January 2009. The markets are betting increasingly that the RBA will pull-out its own emergency rate cut before its next meeting in April, as the next step in the process of an Australian QE program.
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