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When to go long? Markets deflate as central bank rate-cut confidence evaporates (SPY, DJIA, FTSE)

Stock market futures seemed in line for a bounce-back after panic selling saw trillions of dollars wiped off the value of the world’s largest companies. But early indications on Monday were that this promise would evaporate. 

The second half of February saw world indexes tumble as coronavirus fear gripped the markets. The Dow Jones Industrial Average plummeted 13.4% from Wednesday 19 February to the closing bell on Friday 28 February. 

The same day saw a statement by Federal Reserve chairman Jerome Powell signal that the US central bank could step in to lower interest rates in the face of the largest weekly stock-market drop since the 2008 financial crisis.

Time to step in

The fundamentals of the US economy remain strong,” Powell said, while noting that coronavirus “poses evolving risks to economic activity”. He stopped short of making the announcement analysts have been expecting since markets started falling, that an interest rate cut in the region of 50 basis points was coming. 

However, Powell did show his hand to a degree, stating: “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.

This confirms predictions from Goldman Sachs et al that deep cuts in interest rates could be on the slate to shore up jittery markets. 

The asset manager now believes this intervention could come within the next three weeks, before Federal Reserve bankers meet on 16 March 2020. A note by economists Jan Hatzius and Daan Struyven said they expected a cut of 50 basis points to start with, followed by a further 50 basis point cut by the second quarter of 2020.

Standard now Poorer

The S&P 500 rallied to 2,954 at Friday’s close after dropping into correction territory to a six-month low of 2,856. That figure is well underneath its short-term 5 day moving average. There does still appear to be strong support at around the 2,825 level, and the 200-day moving average.

A 12.8% fall to the downside since 19 February has canny investors greedily eyeing an entry here, and I do not blame them. 

But pre-market futures before Monday’s opening indicate a further drop in the region of 1.5% to 2%, so I would counsel investors to hold off from a long bid until things have stabilised further.

UK, world banks to cut too

Outgoing head of the Bank of England Mark Carney warned that the UK could see its economic growth downgraded in the face of the fallout from the spread of the coronavirus. In an interview with Sky News, he pointed to the damage caused to economic activity both from reduced tourism into the UK and “supply chains getting a little tight”. 

We would expect world growth would be lower than it otherwise would be, and that has a knock-on effect on the UK,” he said. 

The FTSE 100 has lost over £200 billion in value over the last seven days. 

Goldman Sachs said they expected the European Central Bank as well as those in most top-tier developed countries to follow suit. The central banks expected to cut interest rates included those in the UK, Canada, South Africa, Australia, New Zealand, Norway, India, South Korea and Switzerland. 

Central bankers are “intensely focused on the downside risks from the virus”. Instead of individual moves to cut interest rates, analysts suggest a co-ordinated move is more likely, to boost confidence as stock markets suffer worldwide. 

When to go long?

Investors will have their fingers on the trigger, waiting for the bottom of this recent plunge to swoop in and scoop up bargains. 

Markets are still too choppy to accurately forecast. The impact of the supply chain shock, as we wrote last week, is still being felt. For now, many companies are relying on stockpiled inventories, but the delay over product delivery will see sales and revenues — at the very least in this quarter — badly hit. And, as we noted last week, central banks cutting interest rates to boost demand does nothing to address supply-side problems. It could even make the problem worse, as demand increases further without the supply to back it up. 

The old adage goes: when the US sneezes, the rest of the world catches a cold. Those warnings of underlying weakness by bearish asset managers now seem prescient, rather than overblown. I would counsel that there is much further for the markets to fall before investors make plans to re-enter for a cheap long bid.

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  • Tom Rodgers does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.
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