On Thursday, March 12, American indices lost tremendously again. The losses were so big that it was necessary to stop trading again for 15 minutes to allow investors to cool down. Then the Fed came to the rescue, announcing that a huge amount of USD 1.5 trillion would be pumped into the system through repo transactions. Today the market was supported also by the Reserve Bank of Australia, which managed to control the falls on the ASX index.
According to the Federal Reserve in New York, which is responsible for open market operations, the Fed will help money market with $ 500 billion through a three-month repo operation.
What are repo operations? In short, they rely on the fact that commercial banks can raise cash by pledging securities. In this way, they can quickly obtain the much needed liquidity to settle their current liabilities. Repo transactions are used to improve liquidity in the financial sector and thus increase cash supply. Then, the banks buy back the pledged securities and give back the cash within the set deadline.
New York Federal Reserve statement yesterday added that one-month and three-month operations for USD 500 billion will be carried out on Friday and will be offered weekly throughout the month. That's a $ 1.5 trillion cash injection this week only. However, even after such a declaration, the US stock market did not rise. Only today we observe a slight attempt to recover, but with earlier declines it is barely noticeable. However, the NY Fed's main goal is to improve liquidity on the Treasury bond market. As stated in the statement, the implemented measures are to remedy the very unusual disturbances on the Treasury bond market associated with the outbreak of coronavirus.
The situation in Australia looks much better, where the main stock index increased by over 4 percent. Investor sentiment in the equity market improved after the Reserve Bank of Australia injected AUD 8.8 billion into the financial system today through repo operations. Furthermore, on Thursday, March 12, Prime Minister Scott Morrison announced that an economy support package worth approximately AUD 17.6 billion will be implemented to reduce the destructive impact of the outbreak on the country's economy.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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