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Top 5 Things to Know in the Market on Monday, March 16th

EconomyMar 16, 2020 18:44
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By Geoffrey Smith -- The Fed and other central banks open the monetary floodgates, but markets around the world are still in freefall as the coronavirus pandemic spreads across the U.S. and Europe. The rest is just details. Here's what you need to know in financial markets on Monday, March 16th.

1. Fed takes emergency action

The Federal Reserve took more emergency action to stem the panic in global financial markets, cutting the target range for fed funds to near 0% and resuming large-scale asset purchases to ensure liquidity.

The Fed said it will buy $500 billion of U.S. Treasury bonds and $200 billion of agency debt, although it didn’t specify a timeframe for its purchases.

In addition, the Fed said it would expand and reduce the cost of dollar swap facilities with five other major global central banks. The facilities were a key element in ensuring dollar liquidity to financial centers around the world during the last financial crisis in 2008/9.

The measures came after President Donald Trump declared a national emergency after the market close on Friday. Trump also announced over the weekend that he had tested negative for the Covid-19 virus after coming into contact with a Brazilian official who has been confirmed with the disease.

2. Central banks open the taps; governments seen following

Other central banks around the world continue to open the monetary taps in an increasingly desperate efforts to keep financial markets orderly.

The Bank of Japan said it would double its target for purchases of exchange-traded funds to the equivalent of $112 billion.  The Reserve Bank of New Zealand cut its key rate by 75 basis points to 0.25% and said it would not raise it for at least a year.  And the Bank of Korea, which had earlier resisted rate cuts despite the country suffering a severe Covid-19 outbreak itself, cut its key rate by 50 basis points to 0.75%.

Elsewhere, Robert Holzmann, one of the more hawkish members of the European Central Bank’s governing council, flagged the possibility of more direct intervention to stabilize eurozone bond markets.

“If there is a need to intervene in the area of government bonds, measures will be taken,” Holzmann said.

Eurozone finance ministers are currently meeting and are expected to announce fresh measures to support the economy later.

3. China’s data as bad as expected

The scale of the havoc wrought on the Chinese economy was confirmed by figures showing sharp declines in industrial production, fixed asset investment and retail sales.

Industrial production fell 13.5% on the year in February, while retail sales fell over 20% and fixed asset investment fell 24.5%. The numbers confirm that a sharp contraction in GDP in the first quarter is all but inevitable.

However, anecdotal reports such as pollution and traffic measures suggest a gradual return to normality continues. In Europe, retailers Kingfisher (LON:KGF) and Associated British Foods (LON:ABF) (the owner of Primark) both reported that their Chinese supply chains were operating more or less normally. Their big concern, as with many others, is now with the extent of store closures in Europe due to public health measures.

4. Stocks set to open sharply lower

U.S. stock markets are set to open sharply lower, giving up around half the gains they made on Friday in anticipation of more emergency policy measures to support the U.S. economy.

By 6:40 AM ET (1040 GMT), Dow 30 futures were down 1,045 points or 4.6% at 21,794 points. The S&P 500 Futures contract was down 4.8% and the Nasdaq 100 futures contract was down 4.6%.

The flight out of risk assets into havens continued, with the 10-year Treasury yield falling 17 basis points to 0.77% and the 2-Year yield falling 17 basis points to 0.32%. Gold futures fell 0.7% to $1,507.00 as investors continued to liquidate positions to meet margin calls in other assets.

Overnight, the Chinese Shanghai Shenzhen CSI 300 index had fallen 5.3%, ending a period of Chinese outperformance, while Australia’s benchmark index fell 9.7% and the Euro Stoxx 600 fell 7.9%.

5. Companies struggle to keep pace with virus spread

Companies around the world issued more warnings about the outlook for their businesses amid increasingly severe shutdowns in the U.S. and Europe. Over the weekend, New York and Los Angeles tightened restrictions on bars and restaurants, while many European countries closed their borders, even within the Schengen free-travel area.

Airlines were again in the front line: British Airways owner IAG (LON:ICAG) said it would run its April-May scheduled at only 25% of capacity, while United Airlines (NASDAQ:UAL) slashed its schedule by half.

EasyJet (LON:EZJ) warned that government support will be needed to ensure the survival of much of the industry. Carnival (NYSE:CCL) suspended new cruises for four more of its lines, having already suspended the Diamond cruise line last week.

Fiat Chrysler (NYSE:FCAU) said it will temporarily close eight plants across Europe, while tiremaker Michelin (PA:MICP) said it will close plants in France, Spain and Italy.

Top 5 Things to Know in the Market on Monday, March 16th

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