The beginning of the week in many markets seems to bring a rebound from late February, when fears about the economic effects of the coronavirus outbreak increased, especially when it began to spread faster outside China. The first fatalities occurred in Europe, Australia, and the United States. The fear and panic of investors seem to put enormous pressure on central bank decisions around the world.
On Friday, February 28, a statement by the chairman of the US Federal Reserve came out saying that "The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
It seems that the market has received this statement clearly, so it's time to prepare for potential interest rate cuts across the ocean. Bank of America writes in a note that it expects interest rate cuts in the US on March 18 by 50 basis points. In addition, the bank sees the possibility of interest rate cuts before the meeting if the situation worsened. JPMorgan speaks similarly, getting ready for a reduction of 0.5 percentage points. The market prices such a deep cut in the interest rate with 100 percent probability. There was also information that Donald Trump could reduce taxes for the middle class by 10 percent, which, together with monetary policy, could help the situation of households. Bond market participants also seem to expect specific actions, heavily buying American debt, the price of which breaks further records as the yields drop.
However, it is not only in the US that action is expected. According to the market, there is a chance of interest rate cuts during tomorrow's RBA (Reserve Bank of Australia) decision. In addition, the Bank of Japan launched measures to support liquidity in the market, and on March 10, the Japanese government is expected to present more measures to counteract the negative effects of the epidemic. Global expectations for monetary easing appear to lead to a rebound in the stock market and the oil market, where the OPEC + meeting will take place on March 5-6. Thus, the negative effects of the weekend publication of Chinese PMIs, which fell to a record low level, seem not so severely to be felt on the financial markets.
Moreover, even in Poland market chances for interest rate cuts by the Monetary Policy Council increased. MPC decision and response to the current situation will be published on March 4 on Wednesday, and meanwhile, the zloty exchange rate is trying to turn back from the highest levels to the dollar and the euro from October 2019.
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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