Market Insights 3/3/2020

After rallying yesterday on anticipation that the Fed would step in to calm markets, U.S. equities sold off sharply today, despite the Fed exceeding expectations for the timing of its next rate cut.

In a surprise move, the Fed lowered its target range for the fed funds rate by 50 basis points, which was widely expected to happen, but perhaps not until the regularly scheduled meeting in March.

Treasury yields reacted with record low yields. The 10-year rate fell below 1% for the first time in history and the 30-year yield also set new records. Yields finished off the lows of the day, but not by much.

The U.S. dollar fell under pressure from the lower yields and dropped versus nearly all of its major peers. Gold rallied strongly and crude oil prices were modestly higher.

Global equities finished with widespread gains, except for in Japan, where a strong yen weighed on stocks.

The Markets…

The Dow Jones Industrial Average shed 786 points (2.9%) to 25,917

The S&P 500 dropped 87 points (2.8%) to 3,003

The NASDAQ lost 268 points (3.0%) to 8,684

In heavy volume, 1.7 billion shares were traded on the NYSE and 4.3 billion shares changed hands on the NASDAQ

WTI oil rose $0.43 to $47.18 per barrel and wholesale gasoline shed $0.01 to $1.53 per gallon

The Bloomberg gold spot price added $49.60 to $1,644.40 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.2% to 97.14

Fed’s surprising rate cut send Treasury yields to record lows

Treasuries rallied strongly on the surprise move from the Fed, with the yield on the 2-year note falling 20 basis points (bps) to 0.70%, the yield on the 10-year note dropping 16 bps to 1.00%, and the 30-year bond rate decreasing 10 bps to 1.62%.

Bond yields added to record lows, seeing heavy pressure on the short end after the Federal Open Market Committee (FOMC) announced a 50 bp cut to its target range for the fed funds rate to 1.00-1.25%, citing that the coronavirus poses evolving risks to economic activity. The FOMC added that it is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy. The FOMC’s emergency action came ahead of its monetary policy meeting later this month.

Outside of the Fed, the market appeared somewhat disappointed by this morning’s G-7 communique, in which finance ministers reaffirmed a commitment to use all appropriate policy tools to combat the market volatility but offered no specific actions.

Global equities continue to rebound

Global equities finished higher, extending yesterday’s rebound and chipping away at last week’s plunge that came as the spreading coronavirus unnerved the markets and bolstered uncertainty regarding the economic impact of the supply and demand shocks. The global markets were choppy in the wake of the surprising rate cut announcement in the U.S.

In a meeting held today, G-7 finance ministers reaffirmed their commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks, but held off on any specific action. The Reserve Bank of Australia cut its benchmark interest rate by 25 bps to a new record low of 0.50%.

The euro, Japanese yen and British pound traded higher versus the U.S. dollar after the Fed’s surprising rate cut. Bond yields around the globe were mostly lower, but Japan saw higher rates. European peripheral spreads fell today with Italian bond yields falling the most.

The U.K. FTSE 100 Index rose 1.0%, France’s CAC-40 Index and Germany’s DAX Index gained 1.1%, Spain’s IBEX 35 Index was up 0.8%, Switzerland’s Swiss Market Index advanced 1.4%, and Italy’s FTSE MIB Index was 0.4% higher. China’s Shanghai Composite Index and Australia’s S&P/ASX 200 Index both rose 0.7%.

The Hong Kong Hang Seng Index finished little changed. South Korea’s Kospi Index gained 0.6% and India’s S&P BSE Sensex 30 Index rallied 1.3%. However, a strong day for the yen weighed on Japanese markets, with the Nikkei 225 Index falling 1.2%.