The Fed made another unexpected decision for the markets on Sunday at an emergency meeting. It cut the key interest rate to zero and announced an unprecedented quantitative easing (QE) program for $ 700 billion.
In the evening of March 15, the Fed already decided to announce emergency measures aimed at supporting the national economy. Never before has the American regulator acted this way in its history. Thus, a decision was made to start repurchasing $500 billion of government Treasury obligations and $200 billion of mortgage-backed securities starting today. The key interest rate was immediately reduced to the range of 0.0% -0.25%. At the same time, the regulator extended the loan term to 90 days.
In addition, the Fed has reduced reserve requirements for thousands of banks to zero. The regulator announced global coordinated actions in conjunction with the central banks of Canada, the UK, Japan, the ECB and Switzerland to increase dollar liquidity worldwide through existing dollar exchange agreements. The American regulator also said that in the future they will be extremely careful to consider the likelihood of interest rates rising.
In the wake of these unexpected Fed, US stock index futures declined by more than 4.0% on Monday. Yields on US Treasury government bonds have collapsed, while the yield of the benchmark 10-year treasuries declines by 28.01% to 0.687% at the moment.
The reason for this collapse, in our opinion, is the growing conviction of the market that the American financial authorities actually signed that they see the seriousness of what is happening, its dependence on the impact of coronavirus on the country's economy.
An additional negativity for the markets was the decline of the Chinese stock market, where the indices collapsed by more than 2.0% and 3.0%. The reason for this fall was the publication of data on industrial production in the "Celestial Empire", which declined to -13.5% in February against 6.9% a year earlier. The indicator was expected to decline to 1.5%.
On this wave of new panic sentiment, crude oil prices are falling respectively Brent by 4.67%, and WTI by 3.08%.
In the currency market, the US dollar receives support for all major currencies, with the exception of the Japanese one. This is due to the fact that there are expectations on the market that rates will continue to reduce other world Central Banks after the Fed, which will ultimately offset the weakness of the US currency. In addition, one should take into account the most important changes that have occurred recently - this is the growth in demand for the dollar, as a safe haven in disastrous times.
Nevertheless, the nervousness of financial markets is being appreciated. We believe that the overall picture on the currency exchange market in general will continue this week, but the dynamics of crude oil prices will depend on the possibility of OPEC, led by the Saudis, to negotiate with Russia. Regarding the movement of stock indices, it can be noted that they will be subject to extremely high volatility. Their behavior will fully depend on the situation with the coronavirus and the incoming data of economic statistics. We believe that as soon as some stabilization is outlined in America, the stock markets will begin to receive significant support, since not only the capital of American investors, but also foreign ones will rush there.
Forecast of the day:
EUR/USD is trading above the level of 1.1100. We believe that it must be sold after crossing this level with a local target of 1.1000.
GBP/USD remains under extreme pressure in anticipation of lower interest rates by the Bank of England. We believe it is possible to resume the sale of the pair with its likely decline to the level of 1.2185.
