Financial markets had a lot to process before the opening. Central banks are slashing rates to zero and ramping up QE efforts, but that does not matter in the short-term as it seems Wall Street was too optimistic over the length of the coronavirus economic impact and are now growing doubting the measures put in place might not flatten the curve in time.
Despite rates cuts falling to near zero by both the Fed and RBNZ, the focus continues to remain on the virus. The largest school system in the US will close and that means many healthcare workers and first responders may not be able to go to work. Unfortunately, the US reacted to slow in containment measures and the it seems they will hit healthcare capacity soon. The CDC announced that gatherings of over 50 peoples should be postponed for 8 weeks, pretty much guaranteeing a disastrous first half of economic data.
The opening act to the Fed’s rate cut came from the RBNZ. The New Zealand central bank cut their cash rate to 0.25%, delayed higher capital requirement for banks and of course signaled if more stimulus is needed, they will buy more government bonds.
The Fed’s second emergency meeting in less than two weeks cut rates to near zero, launched an impressive new QE program, but failed to comfort markets as the impact of the virus is unknowable. A pledge to at least $700 billion in assets will ultimately be positive for risky assets once we are beyond the virus, but that does not seem like it will happen anytime soon. The Fed also pushed the focus back onto the government as a fiscal response is critical and needed soon. The Fed is now all-in on currency wars and their actions should help keep the dollar vulnerable as they finally erased their interest rate differential advantage. The Fed reiterated they do not see negative interest rates and that will probably be true as the last few bullets they have left will heavily rely with QE and buying commercial paper.
Oil initially spiked higher after the Fed slashed rates to near zero as markets opened. The knee-jerk reaction however was short-lived since all the headlines on the virus front point to a worse than expected crude demand story. Cases are surging higher in both in Europe and the US, suggesting the outlook for oil prices seems to be disastrous since demand destruction for crude is about to get a lot worse. Travel via airplanes or cars are not going to return to normal anytime soon and it will be hard to make a case for oil to trade above $30 in the short-term. Markets are still pricing in all this stimulus, but once that settles both Brent and WTI crude should fall toward the mid-$20s this week.
Gold is slowly getting its groove back. Gold prices will ultimately benefit from all this global monetary and fiscal stimulus. Gold should grind its way back above the $1,600 an ounce after we see all the other central banks ramp up their efforts this week.
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