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Main » 2020 » March » 17 » Dollar burned the entire stock of wood! The fact that the Fed is almost eliminated from the game, seriously spooked financial markets
Dollar burned the entire stock of wood! The fact that the Fed is almost eliminated from the game, seriously spooked financial markets


We wanted the best, it turned out as always. Market reaction to the decline in the federal funds rate by 50 bp at the extraordinary meeting of the FOMC March 3 did not convince the Fed that in the current situation it is necessary to remain cautious. The central bank decided that aggressive measures will save the S & P 500. Alas, in response to a reduction in borrowing costs to 0.25% and to launch QE by $ 700 billion stock index dipped by 12%, erasing all your achievements for 2019. Worst performing since 1987 It was due to fears due to the fact that the Fed has exhausted its resources and actually dropped out of the game. 



The fact that the volatility index VIX jumped to record maximum and S & P 500 is changed to 4% and more over 6 consecutive days trading is not surprising. Such movements are characteristic of the "bear" market. 


S & P 500 Dynamics


Source: Bloomberg.

In late February, he was clearly overbought, something had to start the mechanism of correction, which in turn would lead to a serious weakening of monetary policy and liquidity trap. A situation where a large-scale supply of money does not lead to an increase in demand. So the trigger was the coronavirus. 

You can take a horse to water but you can not make it drink. The Fed is not able to bring the epidemic frightened people out of the house. With the help of cheap liquidity can solve many problems of the companies, but increase their revenue amid a sharp decline in demand. The fact that the major central banks of the world have spent most of the wood, which they had stored for the winter, was the catalyst for the biggest sales in the US stock market since 1987. Fuel to the fire poured Donald Trump talking about recession.  

Obviously, the speech of the president in the first place was addressed to Congress, which opposes the advancement of the White House's fiscal stimulus program of the project. According to the chief economic adviser Larry Kudlou, it is a package of $ 800 billion, including tax cuts payroll.

Stock indexes obviously waiting for the US GDP contraction in the first and second quarters and draw parallels with China, who first felt the blow of the epidemic. In January and February, industrial output China declined by 13.5%, retail sales - by 20.5%, investment in fixed assets - by 24.5%. 


Dynamics of Chinese indicators


Source: Bloomberg.


While the ECB and the Fed is almost exhausted its possibilities, investors' attention switched to the fiscal policy. And if the White House will be extremely difficult to carry out their ideas through Congress, then everything can be easier in Europe. Eurozone finance ministers are discussing the possibility of using resources € 410 billion European Stability Mechanism to assist affected by coronavirus eurozone. 

Rally EUR / USD could be an important driver of carry traders close positions. Significant rate differential on US and German debt made it possible for the players on the difference between a good living, but fell sharply in the last few weeks Treasuries yields, which makes them get out of deals. In this case, the resistance breakout to $ 1,122 is able to inspire the "bulls" on the euro in the new attack.


Source analyst LiteForex



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