S&P 500 opens down despite Federal Reserve’s unlimited QE
The US stock market opened with a 1.42 per cent drop at the start of Monday’s session, falling to 2,272 points.
This is despite the US Federal Reserve announcing an ‘unlimited’ QE package through its purchases of US Treasuries and agency mortgage-backed securities.
The Fed’s announcement has failed to cheer investors, with London’s FTSE 100, Germany’s Dax, France’s Cac 40, Italy’s FTSE MIB and Spain’s Ibex 35 all still in the red
Fed doing “whatever it takes”
As the Federal Reserve announced that its quantitative easing will be unlimited in scale, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: “This is an all-out effort to ensure that the business sector can continue to exist even as economic activity temporarily collapses.
“The Fed is now effectively the direct lender of last resort to the real economy, not just the financial system. Open-ended QE – this always looked inevitable – plus purchases of both primary and secondary market corporate bonds, and bond ETFs, for investment grade businesses (BBB/Baa3 or above) represents a huge easing.
“It removes one key element of the uncertainty facing investors, though the other two – the extent and duration of the spread of the disease, and the ultimate fiscal response – are still unknown. The Fed’s balance sheet is now set to re-expand rapidly and substantially – especially if the fiscal package initially is financed by the Fed, as we expect – but that’s nothing to worry about; the near-term threat to the economy is existential. We can fret about inflation risks later, because right now the threat is a deflationary collapse.”
Fed commits to unlimited QE
The Federal Reserve will carry out unlimited purchases of US Treasuries and agency mortgage-backed securities to help support markets through the coronavirus crisis.
The US central bank announced the move today, alongside some additional lending tools to bolster struggling companies, as European stock markets opened the week with renewed losses.
In a statement, the Fed said: “The Federal Reserve is committed to use its full range of tools to support the US economy in this challenging time and thereby promote its maximum employment and price stability goals.
“The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation's first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”
Company results delay “is not what the market needs right now”
AJ Bell’s Russ Mould said news that the Financial Conduct Authority is asking listed companies to postpone their preliminary results for at least two weeks to allow more time for them to understand the impact of coronavirus on their profitability “is not what the market needs right now”.
“The FCA’s desire to avoid stoking panic is perfectly understandable but the call for a delay in the publication of preliminary results leaves firms in a difficult position. Companies are duty bound to update the market once it becomes clear that their results are likely to be notably ahead or behind forecasts,” Mould said.
“In the current environment, no-one expects firms to be able to give precise forecasts as to the potential downturn they are facing or the impact it may have on sales, profits and – above all - cash flow. And share prices are already anticipating massive downgrades anyway.
“What shareholders and analysts are looking for is comment from management on what they are doing to preserve cash and give their company every chance of coming out the other side of the crisis and be ready for the eventual upturn.
“In the absence of information, people will make things up. This isn’t a positive step and has now got people posing the question of shutting down markets. This would be a catastrophe and represents the single biggest policy risk to the financial world right now. You don’t give up on price discovery because you don’t like the price. You don’t remove liquidity and access to savings when people are seeing a shuddering halt in their cash flows.
“The absence of commentary from management on their financial and contingency planning is far more likely to lead to a disorderly market than one where Boards are doing their best to communicate in as realistic a fashion as is possible in the current circumstances. This is what investors are looking for now. They know forecasts are likely to be wrong, are pricing in dividend cuts and are already expecting bad news.”
“We are nowhere near being out of the woods or even close enough to guess on when that could potentially be”
Edward Moya, senior market analyst, New York, at OANDA, said: “Global equities got off to another terrible start after Democrats blocked the Senate’s coronavirus economic response rescue package. Risk aversion appears here to stay as investors become more fearful that this could be the worst global recession during peacetime. Volatility was supposed to start to calm down as central banks unleash a wrath of liquidity programs and stimulus, but coronavirus updates in Europe and the US continue to suggest we are nowhere near being out of the woods or even close enough to guess on when that could potentially be.
“This week investors will start paying attention to economic data as we will see how bad it is getting for western economies. The flash PMIs will be key for many economic models for trying to price in how bad the virus has brought business to a halt. The pressure is on for US leaders to deliver stimulus for businesses and Americans as many hourly workers will be filing jobless claims. Expectations are pretty high Congress will get something done this week, but US stocks will remain vulnerable on virus uncertainty.
“Every passing day it seems lockdown efforts are intensified globally, thus it seems financial markets will remain nervous until we see the infection rate improve in both US and Europe. Now that the US finally made some progress in delivering testing for the virus, markets could see in a few weeks if the lockdown efforts were successful enough in delaying the hitting of healthcare capacity. Circuit breakers have become far to common over the past four volatile trading weeks and will probably be used again this week.”
FTSE and European stocks tumble at start of new week
London’s FTSE 100 index and stock markets across Europe fell by around 4 per cent at the start of trading today following a surge in coronavirus cases over the weekend and delays to a US stimulus package.
The drop down in stock markets followed days of worsening coronavirus news – more than 130,000 cases have been confirmed globally in the past four days. Italy suffered 1,400 coronavirus related deaths over the weekend, according to The Guardian, keeping the country at the centre of the coronavirus crisis.
This came alongside increased ‘lockdown’ measures as many countries close their borders to non-essential travel and the UK goes into its first week with schools, cafes, pubs, gyms and other business closures.
In the US, Congress struggled to reach a deal with the Trump administration surrounding the Republican’s $2tn fiscal stimulus bill, which includes measures to provide direct payments to US households. A family of four could receive $3,000 under the proposals.
Friday’s TN Live Blog
Chancellor announces “unprecedented” fiscal response to coronavirus