Financial markets are in the throes of a panic precipitated by the spreading coronavirus and exacerbated by a surprise oil price war between Saudi Arabia and Russia, which refused to go along with OPEC production cuts.
U.S. stocks opened limit down, off 7% from the previous close, triggering a trading halt, and ended the day near where they began, with the S&P 500 down and Dow Jones Industrial Average down about 7%. Same story for the 10-year Treasury bond yield, ending trading today at 56 basis points, slightly above the 50 basis points that prevailed earlier in the day. Oil prices also recovered slightly from their earlier 30% decline, and ended the trading session in the U.S. 25% below their previous close.
Corporate bonds, too, suffered stiff declines as spreads to equivalent maturity Treasuries in the high-yield and investment-grade markets.
Monday was “one of the few times in market history [that] more than 50% of securities on the NYSE fell to a 52-week low while few hit a 52-week high,” tweeted Liz Ann Sonders, chief investment strategist at Charles Schwab. “In the past four decades, only 1987 and 2008 have exceeded this.”
Now financial markets are waiting to see how the Federal Reserve and other central banks respond to the market chaos, which is global, and what if any fiscal stimulative response is forthcoming from the White House and Congress. In addition, markets are watching for any progress in the Saudi-Russia oil conflict and most important, in containing the spreading coronavirus.
‘If the growth rate in new cases starts to abate at the end of April, then our base case is that there is a slowdown in the U.S. and globally but a recession can be avoided,” said Andrew Patterson, senior economist at Vanguard. “If we push out into May or June then we’re talking about a technical recession, more like 2001, but if we push into the summer, then we’re talking about a significantly greater impact.”
“You have to expect the central banks will come out with coordinated rate cuts and asset buying,” said economist and money manager Gary Shilling, co-founder of A. Gary Shilling & Associates, who believes the U.S. economy is either on the verge of recession or has already slipped into one.
The Fed announced a surprise 50 basis-point cut in the benchmark federal funds rate last week, but that failed to calm markets and if anything spooked them.
Markets are now pricing in 71% odds of a 75 basis-point cut at the central bank’s next policymaking meeting on March 17-18. Earlier Monday morning, the Federal Reserve Bank of New York said it would increase the amount of short-term lending it conducts daily and biweekly to satisfy rising demand from banks and short-circuit any additional strains on banks and businesses preparing for disruptions from the coronavirus outbreak.
“There is little room for the Fed to cut now,” said Collin Martin, fixed income strategist at the Schwab Center for Financial Research. “There’s a high probability we will go back to zero rates, and we’ll need coordinated fiscal action as well.”
The fed funds rate is currently in the range of 1%-1.25%. The last time the Fed cut the rate to near zero was during the financial crisis in 2008. It remained in the 0-0.25% range until 2015.
“The markets are “looking for policy responses,” says Patterson. “What the Fed does from here will be closely followed,” he said, along with fiscal moves by the federal government.
— Related on ThinkAdvisor: